Anybody hoping for a replay of the stock market advance that followed U.S. President Donald Trump’s first address to Congress may be disappointed. This time around, shares could suffer if Mr. Trump does not tread carefully on hot-button issues.
The S&P 500 jumped 1.4% the day after Mr. Trump’s speech last February, as an unexpectedly measured tone from the notoriously abrasive president boosted investor optimism that he would be able to deliver on pro-business campaign promises. But with a new tax law under his belt, Mr. Trump is expected to use his State of the Union speech on Tuesday to applaud that victory and broach topics including trade agreements, immigration reform and infrastructure spending.
That may not be enough to inspire investors further, after enthusiasm about corporate tax cuts helped push the S&P 500 up more than 19% in 2017 and close to 7% so far this year.
“Nothing is going to trump tax reform,” said Michael ORourke, chief market strategist at JonesTrading. “Since I expect the president to do a victory lap, the typical market reaction would be a sell-the-news reaction in contrast to last year.” The S&P 500 has had only 4 daily declines so far this year, and the chances of a Jan. 31 sell-off are higher if the market does not take a breather before then, Mr. O’Rourke said.
Investors could be rattled by tough talk from Mr. Trump on issues including U.S. immigration policy, which has already divided lawmakers in a Republican-controlled Congress and led to a three-day government shutdown.
“He’s got to tread carefully on the hot-button items,” said Phil Blancato, chief executive of Ladenburg Thalmann Asset Management, citing immigration and trade talks. He noted that a “pro-immigration agenda” could be the easiest way to expand the U.S. workforce to boost an economy with a tight labour market.
Congress agreed to extend funding to Feb. 8 and the White House is expected to unveil an immigration legislation framework a day before the speech. Strategists also are wary about how Mr. Trump will approach international trade, including the North American Free Trade Agreement (NAFTA) in his speech.
‘Protectionism is bad’
“We know historically protectionism is bad for the economy. It’s bad for markets. You open a great deal of uncertainty if you hone in on that,” said Mr. O’Rourke. Any trade comments would also come on the heels of Mr. Trump approving a steep tariff on solar panels and washing machines, moves those industries have warned could raise prices and endanger jobs.
To be sure, Mr. Trump could boost sentiment with details on a plan to rebuild U.S. infrastructure. On Wednesday, he promised $1.7 trillion in investments over the next 10 years. But any related gains may be limited to sectors like industrials and materials. Investors may also be less sensitive to the speech’s message this time around.
“Short of something truly stupid like a trade war with China or a withdrawal from NAFTA...we don’t see a scenario where investors are likely to elevate politics to the same level of importance as the global recovery and improving earnings,” said Robert Phipps, a director at Per Stirling Capital Management.
