What Comes Next?
The giddy optimism that propelled the stock market to record heights the past several months finally ran into a wall in March, as investors realized that enacting President Trump’s agenda could take far longer than anyone expected. Because that agenda fueled the stock market’s record surge, the tide turned sharply the other way, with the Standard & Poor’s 500-stock index falling sharply during the first three weeks of March before rallying to close near breakeven for the month.
The Federal Reserve’s modest rate hike on March 15, which many saw coming, wasn’t the problem. In fact, investors had braced themselves for worse. But Fed Chair Janet Yellin’s remarks about future rate increases turned out to be less hawkish, and her comments about the economy and inflation were overwhelmingly positive.
The storm clouds came from a different direction: the dissension among Republicans over the details of the proposed American Health Care Act, which went down in flames March 24. This ignominious end to healthcare reform was a surprise given the party’s zeal for overturning Obamacare and the four months (if not seven years) that Republicans had to come up with a replacement. Unlike the mostly partisan Democratic resistance to some of Trump’s cabinet nominations, the blame for not passing “Trumpcare” rests entirely with the GOP.
It’s too soon to say if the party’s schism signals more friction ahead, but investors are starting to wonder if Trump can deliver on his other lofty promises like tax reform, deregulation and a border adjustment tax. That pro-growth agenda was why investors have been buying up stocks, but doubts of it happening threaten to reverse more of the market’s gains.
Although Trump needs a win, a comprehensive tax reform bill risks another embarrassing failure. Instead, he may decide to focus narrowly on a watered-down version of the border adjustment tax, something even moderate Democrats and conservative Republicans might agree on. If so, retailer stocks, already pummeled because of the trend toward fewer shoppers in malls, could drop further and become a great buy once momentum investors realize the game is up.
As an example of how some of the better retailers might perform, consider the case of Best Buy (BBY) which bottomed out three years ago below $25 after given up for dead due to Amazon’s rapid online encroachment of its music and video sales. But its management team moved aggressively into other product areas beyond the reach of Amazon, and its stock price is now approaching $50 as the company cranks out one impressive quarterly result after another.
Not all retailers will bounce back as strongly as Best Buy has, but I believe some of the higher quality names will find a way to build a deeper moat around their bricks and mortar stores. Wal-Mart is experimenting with adding an upscale yogurt café by partnering with Chobani, while Target is dividing its stores into two very different shopping experiences. In an upcoming issue of Personal Finance I examine this new world of retailing, and add a new name to my growth portfolio that I believe will weather the storm.