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US stocks knocked as healthcare vote gets pulled

US stocks suffered their worst weekly performance since the November election after Donald Trump failed to rally support for his healthcare plan, raising the pressure on the US president as he pursues the rest of his agenda.

After trading up for most of the session on Friday, the S&P 500 sold off as it became clear the alternative to Barack Obama’s Affordable Care Act lacked the votes to pass the House of Representatives. The benchmark US stock index then rebounded from its lows when the White House withdrew the bill in a sign that it was ready to move on from healthcare.

The S&P 500 slid 0.1 per cent on the day to close at its lowest level in a month, paring a 0.4 per cent advance at the open of trading and resulting in the worst week for stocks since Mr Trump’s election at down 1.4 per cent.

Mr Trump quickly teed up tax reform as his next focus, but some investors warned that the failure on healthcare was a reminder of how the political process works even when one party has a majority.

“I don’t think getting tax reform done will be any easier than getting this healthcare bill done and as investors peel this back and see the sausage factory they are getting a little queasy,” said Jack Ablin, chief investment officer of BMO Wealth.

A plan to “repeal and replace” the Obama administration’s landmark healthcare legislation with the American Health Care Act was a campaign promise of Mr Trump’s. Heading into the vote there was nervousness that failure would shake investors’ confidence in the president’s chances for the planned pro-growth policies that have fuelled the bull market partly on the belief that they could breeze through a Republican-dominated Congress.

The prospect of tax cuts, infrastructure spending and deregulation have driven the so-called Trump trade that has taken major benchmarks to consecutive highs.

Some saw Mr Trump’s high-profile mis-step on healthcare as providing an incentive to accelerate the rest of his agenda.

“This increases the likelihood that you are going to a get a tax-cut package perhaps sooner than anticipated simply because of the political necessity,” said David Donabedian, chief investment officer at Atlantic Trust. “The president and the Republicans look like the gang that can’t shoot straight on the healthcare issue. They really need to deliver on tax cuts and fiscal stimulus. Failure is not an option.”

Mr Donabedian now also expected a more traditional tax cut package versus tax reform, leaving aside controversial elements like the border adjustment tax in order to smooth passage and avoid a repeat of the healthcare debacle. Nonetheless, defensive sectors were among the only ones to finish the week unscathed, with utilities extending a streak of outperformance. Shares of hospitals, which have benefited from the rising number of insured Americans, rallied on Friday.

By contrast market measures of volatility whipsawed on the day, with the CBOE’s Vix index of implied volatility, known as Wall Street’s “fear gauge”, hitting its highest level of the year before the market rebounded off of its lows.

Dropping the healthcare bill provided some solace to investors in that it will avoid a lengthy debate and restructuring of the plan, a process that could have dragged out and delayed tax cuts. Still, Mr Trump suffered the biggest blow of his young presidency with the scuppering of the healthcare vote, denting the morale on Wall Street where the president has been given leeway to get his agenda into shape.

“It [healthcare bill] shows that president Trump has challenges uniting the different factions of the Republican party and if you are an investor positioning off of new tax reform and legislation changes, that is a worry,” said Terry Simpson, a strategist with BlackRock. Mr Simpson added that if Mr Trump continues to struggle to build consensus among his party it would force “us to rethink our positioning”.

Michael Underhill, a portfolio manager at RidgeWorth Investments, added: “This is Trump’s mulligan. He will be able to drop it and move on to the next thing, but the market will be less forgiving after this incident.”

Via FT