Stock market cooling off from the 'Trump bump'

Wall Street has muddled through a bumpy 2018, with the economic optimism that drove major gains during President TrumpDonald John TrumpNFL freezes policy barring players from protesting during anthem McConnell spokesman on Putin visit: 'There is no invitation from Congress' Petition urges University of Virginia not to hire Marc Short MORE's first year in office steadily eroding.

Stocks have seen rampant volatility this year, in part because of rising trade tensions and growing questions about the outlook for the U.S. economy. While major U.S. stock indexes are still priced well above what they were before Trump took office, they've fallen close to 10 percent from their record highs.

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The picture was very different last year, when excitement for sweeping U.S. tax cuts and increases in corporate earnings fueled a massive stock surge dubbed the "Trump bump."

Analysts generally see the white-hot stock market frequently touted by Trump as coming back to earth. 

“It is overdue,” said Frank Cappelleri, executive director of institutional sales and trading at Instinet. “We have to put it in the context of where we came from. You didn’t know when it was going to end, but it had to end.”

Trump entered his presidency promising to slash taxes, cut regulations and loosen strict banking and lending rules imposed after the financial crisis. With Republicans controlling Congress, investors grew confident that those promises would become reality — and that businesses would benefit.

Bullish traders saw positive signs almost everywhere in the economy during Trump’s first year. Unemployment sank to 4.1 percent. Consumer confidence and spending rose. Corporate earnings outpaced projections, and the economy began growing at a faster pace.

But 2017’s euphoria has started to fade. With the GOP tax cuts enacted, analysts are now scouring for signs that lower rates are actually fueling more growth. 

“People don’t quite know how these things are going to play out," said Shawn Snyder, head of investment strategy at Citi Personal Wealth Management. “I don’t think this is out of the norm. I think last year was out of the norm.”

Dozens of corporations have announced raises and bonuses for employees since passage of the tax law, but the overall impact on paychecks remains to be seen. Growth in the first quarter of 2018 has also lagged behind expectations, indicating little immediate benefit from policies that could take several months to impact the economy.

Analysts say traders had priced in boosts from the tax cuts into their 2017 buying spree, sending share prices higher largely on optimism. Investors pulled back in shortly after the tax cuts passed in late December as they waited to see how the initial bets would pay off. That was the first sign of a broad correction.

Stocks hit another set of speed bumps in late January over fears about growing trade conflicts with U.S. trading partners and the Federal Reserve’s tightening monetary policy. Weeklong sell-offs in early February and late March produced the worst five-day stretches for U.S. stocks in two years. 

The market dives continued in April as Trump moved the U.S. toward a trade war with China by threatening to hit the country with billions of dollars in tariffs. China has threatened to retaliate with tariffs of an equal amount. 

Investors have also been looking for any sign that the Federal Reserve could hike interest rates more than the three times it had projected. Higher interest rates tend to depress investment in stocks and push investors toward less volatile assets. 

Still, Wall Street veterans see the sharp sell-offs as part of the correction from 2017’s highs, not signs of an impending economic calamity.

“The market was very overvalued, at its peak it was looking for a reason to sell-off even before the tariff issue arose,” said Daniel Alpert, managing partner of investment firm Westwood Capital. “I’m seeing a bunch of people who are very scared about headlines.” 

While the current tariffs proposed by the U.S. and China could cost 200,000 American jobs and shave 0.3 percent in gross domestic product (GDP) off of growth, the economy remains on track for expansion. 

The Fed has projected the U.S. economy to grow by 2.7 percent of GDP in 2018, while the White House has predicted 3 percent growth each year through 2020.

“My sense is that this is a lot of screaming, yelling, chest thumping, but at the end of the day it won’t do much economic damage,” said Mark Zandi, chief economist at Moody’s Analytics, referring to the fight over tariffs.  

“There won’t be a whole lot of good that comes from this … but it’s still solid growth.”

Still, the tariffs are expected to hit some areas of the economy. 

Retailers are expected to raise prices as the costs of Chinese goods increase. U.S. farmers and manufacturers, meanwhile, are bracing for fewer sales of soybeans, pork, automobiles, chemicals and hundreds of other U.S. exports targeted by Beijing. 

The tensions between the U.S. and China showed few signs of easing Friday as stocks plunged yet again over fears of further retaliation. Trump on said on Thursday that he’d consider imposing $100 billion more in tariffs on China, drawing pledges from Beijing to retaliate further. 

The Dow Jones industrial average closed 572 points lower Friday, a 2.3 percent decrease, while the Nasdaq and S&P 500 index dropped 2.3 percent and 2.2 percent, respectively. 

Treasury Secretary Steven MnuchinSteven Terner MnuchinDem lawmaker calls for cryptocurrency probe after Mueller indictments Meet the woman who is Trump's new emissary to Capitol Hill On The Money: Fed chief lays out risks of trade war | Senate floats new Russia sanctions amid Trump backlash | House passes bill to boost business investment MORE said there was the "potential of trade war with China" but added that he is “cautiously optimistic that we will be able to work this out." 

If not, Trump runs the risk of plunging markets into greater turmoil. Analysts are less concerned about the tariffs and more troubled by the breakneck pace of action and mixed messaging from the White House. 

“We’ve seen kind of over and over again that they come out with a blunt instrument, then dial it back,” Snyder said. “To me, the real harm is if it continues to escalate.”