One plunging stock shows exactly what's at risk with the Trump trade
US Steel enjoyed a post-election stock price surge, which reached 69% at its peak. As the nation's second-biggest steel producer, the company was a way for investors looking to capitalize on President Donald Trump's $1 trillion infrastructure spending pledge, and his push to get people to 'buy American.'
But a company can only trade on expectations for so long. Eventually, optimism has to be backed up with actual results.
And so when US Steel posted a per-share loss on Tuesday night that was more than double analyst forecasts, reality set in. Almost $1.5 billion of lost market cap later, US Steel stands as a cautionary tale for investors across all industries who are willing to overlook fundamentals with hopes that government measures will boost their bottom line at some point in the future.
Now, with reports suggesting the White House is planning to move the infrastructure spending back to 2018 at the earliest, the company's three remaining earnings reports this year are looking awfully ominous.
That US Steel's share price comeuppance was so swift should come as little surprise, given the apparent lack of worry and hedging activity in the US stock market. As of Tuesday's close, the CBOE S&P 500 Volatility Index - commonly known as the "fear gauge" - sat just 1.5 points from a record low and 43% below the bull market average.
Creeping realization
To be fair, investors in US Steel had already begun souring on the post-election trade, with the stock falling 25% over about 8 weeks after reaching a more than 2 1/2-year peak in February. It was part of a market-wide unwinding that saw investors frustrated with Trump's lack of progress on the policy front.
And it's not as if investors aren't growing worried about the Trump trade getting over-extended. A record number of institutional investors think US stocks are the most expensive in the world, according to Bank of America Merrill Lynch's latest Global Fund Manager Survey.
But it's not just US Steel and other industrials that have rallied hard in the wake of Trump's election. The other areas of the market on notice now include highly-taxed companies that would be helped by a big cut that may or may not make its way through congress, and financial firms seen benefiting from looser regulations proposed by Trump.
While they won't all whiff the way US Steel just did, all of them have been pumped up by the Trump trade.