The market dumped last Tuesday. For a good graphical representation, look at the three-day chart of the S&P 500 I keep on my desktop.

Inverse Trump Trade

Trump Trade

You can see a pretty radical change in price action from one day to the next.

What happened?

The job of financial journalism is to try to explain the day-to-day variations in the stock market. Oftentimes, there is nothing to report—lots of randomness. This time, on the other hand, stocks went down hard—so there must be a story behind it.

The Repeal That Wasn’t

The best explanation as to why stocks dumped on Tuesday is because it became increasingly unlikely that the “repeal and replace” of the Affordable Care Act would pass.

That means the market doesn’t get the tax cut. And the market cares about tax cuts.

This is going to cripple the Trump administration politically and delay a complete tax reform package even further, possibly into next year—if it happens at all.

Remember, the whole reason that the market ran up after the election was because Trump was this can-do businessman, capitalist president, who was going to cut corporate and marginal rates to the bone.

That is looking less and less likely. Maybe even impossible.

Missed Opportunities

I have been telling people (privately) that it was a big mistake for the Trump administration not to pursue tax reform first. Instead, we issued a couple of ham-handed executive orders that pissed everyone off and lost a lot of political capital, and then dove into the hornets’ nest of healthcare.

It’s odd—this group of people who were pretty smart about winning the election are turning out to be pretty dumb about legislative priorities.

Worse, both Trump and Mnuchin have said that people can use the stock market as a yardstick of the administration’s performance.

Oops.

But the reality is, the stock market continues to be a good yardstick of their performance—and the judgment is negative.

Where is the Trump Rally Headed?

Investors got too enthusiastic about what Trump was capable of, bid up asset prices to unsustainable heights, and now that reality is settling in, stocks are going to have to find fair value. It might be a lot lower than here.

Because the reality is, if you can’t get tax cuts passed under Donald Trump—when can you get them passed?

What I have said repeatedly in The 10th Man (subscribe here for free) is that the danger to the Trump rally was Trump himself. I have talked for a while about “good Trump” and “bad Trump,” and since the inauguration, we’ve mostly had bad Trump.

Should we really be surprised? Trump never campaigned as a Reagan/Laffer supply-side tax cutter. Never did. He campaigned as a fire-breathing populist.

So why is everyone shocked when he turned out to be a fire-breathing populist after being sworn in? It seems as though investors collectively convinced themselves that Trump was something he was not.

Not that I think Trump wouldn’t eventually get around to cutting taxes. He would. It’s just not his top priority.

So I think everyone pretty much knew this healthcare vote was not going to go well.

Now what?

The stock market doesn’t like “Now what?” It doesn’t do well with open-ended risk. I think, at a minimum, the market could give back the gains since the election. That takes you back to 2100 in the S&P. That’s more than a 10% move—and it will feel worse than that.

It may be fruitless to try to prepare for a correction, but it is irresponsible not to try to shore up the portfolio once it’s underway.

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