What Washington Activity, Or Lack Thereof, Means For Markets

The latest attempt at repealing and replacing the Affordable Care Act died in the Senate today, which begs the question of whether President Trump will pivot to tax reform as his next big task to tackle. He should, wrote Steve Forbes, Larry Kudlow, Arthur Laffer and Stephen Moore in an op-ed in Investor’s Business Daily on Friday:

In recent weeks the tax cut agenda seems stalled out and the delays and indecision are negatively affecting growth and the stock market. We hear that a tax plan from the White House may not come until the fall and may not even pass Congress until 2018 – if at all.

Is it any wonder that investors are getting jittery? The stock market had priced in much of the anticipated benefits to business, wages and profits, which accounts in no small part for the $3 trillion rise in equity values and the surge in business and consumer confidence after the election. Now the confidence is waning.

The Washington Post reports:

In reality, the U.S. stock market continues to hit all-time highs, although they are right that confidence in the Trump economic agenda is starting to decline.

“We hear that a tax plan from the White House may not come until the fall and may not even pass Congress until 2018 – if at all,” they write. Goldman Sachs, the investment bank with many alums in the White House, has been giving clients the same warning since the spring not to expect any action on taxes until 2018.

Meanwhile, as Forbes, et al. argue to cut taxes now, balance the budget later (“revenue neutrality is an inside-the-Beltway trap and will prevent passage of a strong tax cut,”) House Republicans released their “Building A Better America” budget first thing this morning, with the top goal being to balance the budget.

Should we be concerned about the markets in this state of inertia? The U.S. stock-index benchmarks did trade lower today, at least in part in response to uncertainty due to failure of the health care bill. But the news is not that bad, at all. Reports Morningstar:

“Investors are taking a pause here as they realize that the failure to pass the health-care bill means the tax reform is delayed. But at the moment, earnings and still growing economy is enough to support equities,” said Diane Jaffee, senior portfolio manager at TCW.

The Dow Jones Industrial Average , most recently was down 89 points, or 0.4%, to 21,542. The price-weighted gauge was being weighed down by Goldman Sachs and UnitedHealth Group Inc.(UNH).

The Nasdaq Composite Index was up 10 points, or 0.2%, at 6,324, above its record close set June 8.

The dollar … fell earlier Tuesday against its main rivals after Republican leaders in the Senate late Monday ditched their effort to repeal and simultaneously replace Obamacare …., also known as the Affordable Care Act.

Still, some investors appeared mostly bullish about recent quarterly results and economic environment.

“The market is responding to earnings releases this week, but the bigger picture remains positive: low inflation, low interest rates, weaker dollar and a benign economic environment all bode well for stocks,” said Maris Ogg, president at Tower Bridge Advisors.

She said signs of global strength were also heartening.

“European economy is growing, China is growing and companies are making money, which suggests that earnings growth for next year looks good,” Ogg said.

Despite modest losses on Tuesday, the main indexes were hovering near record levels set last week.

Ogg said the stock market hasn’t been relying on sweeping reforms from President Donald Trump’s administration, including tax cuts, regulation and infrastructure spending, which is why the reaction in equity markets to the collapse of the health-care bill has been muted, so far.

“Even though we haven’t seen any specific reforms yet, this administration is still very business-friendly, which has not gone unnoticed by stock investors,” she said.

Wondering what’s in store for the local and global economy? Searching for key indicators? Look no further, economist Anirban Basu is on the case, delivering the session, “Markets, He Wrote:  Looking for Clues into the Economy’s Direction,” at the MACo 2017 Summer Conference on Friday, August 18 from 11 a.m. to noon.

Learn more about MACo’s Summer Conference: