Stocks Drop On Ryancare Failure

The stock market fell slightly on Friday because Ryancare failed to pass the House once again. In my last article, I laid out two possibilities for why President Trump pushed ahead with wanting a vote on Friday. It ended up that the GOP didn’t have the votes and he was expressing frustration with the process. Congressional leadership doesn’t like to make its members vote on politically tough legislation if it won’t pass. It’s paying the political price for nothing; it’s all pain, no gain. Therefore, Friday became a repeat of Thursday as the vote was cancelled again.

As I mentioned, the situation is not black and white. While the vote failing isn’t necessarily the end of the line for healthcare reform and fiscal stimulus, the odds of that being the path we go down have increased this week. The White House is already trying to make sure reporters know that tax policy and healthcare reform are not joined at the hip. That’s a very bad sign because it shows that many questions are being asked about it. Obviously, the White House will claim its other goals are still on the table, but if it offends House members, they are less likely to support the Trump administration’s other measures.

The worst part of the process is that both moderate and conservative members of the GOP caused the bill to fail by defecting. According to CNBC’s reporting, 34 Republicans defected. There are only 29 members in the House Freedom Caucus which means at least 5 moderates would have voted against the bill. Numerically, the plan may have been close to succeeding, but philosophically it didn’t come close since both sides didn’t support it. When legislation is passed in a bipartisan manner, those on the far right and far left can oppose it because there’s a large margin of error. That’s not the case when only one party is trying to get a bill passed. This is a strong signal that the factions within the GOP will have a tough time cooperating on future legislation. It’s also a signal that leadership doesn’t have control over its members.

To clarify, there was another tweak made to Ryancare in a last ditch effort to get it passed. The minimum insurance requirements of Obamacare were eliminated. This was a part of Rand Paul’s plan. The CBO didn’t have a chance to score the plan’s changes. The problem with the bill was that when it was unveiled, it was unpopular in Congress. This led many conservatives to campaign against it. Even though amendments were made to garner more support for it, starting out on the wrong foot meant it was doomed before it could gain momentum. It was also rushed for no reason. The process was fast-tracked, but then never came to the floor to be voted on. That description is a perfect summary of this situation. It was like driving full-speed into a wall.

The stock market’s selloff in response to the failed attempt at healthcare reform remains moderate. Although the stock market suffered its worst week in 6 months, the S&P 500 is only down about 2.5% from its all-time closing high. This is much less of a selloff than I anticipated, but I don’t think it’s over. One of the reasons the market has rallied so much since Trump’s election is because of the great soft data such as the NFIB small business index, the consumer sentiment surveys, and the ISM reports. The consumer sentiment survey has become partisan since the election. With this legislative mistake, I expect the Republican optimism to wane.

I try to understand why investors are bullish so I can figure what catalysts can change their minds. Clearly, I don’t have a perfect understanding of their perspective since I’m on the opposite side. I cannot say for sure if significantly diminished consumer sentiment and small business optimism will cause them to stop buying stocks. Those would be objectively bad data points, but I recognize that I could be wrong about them spurring a selloff.

It looks like the Congress will move on to tackling tax reform after healthcare reform didn’t work out. There are two major problems with this. The first is that the political momentum has now reversed. The second is that the GOP’s healthcare plan was supposed to bring down government spending. The deficit was expected to be reduced by $337 billion over ten years. The budget benefits of the healthcare plan could’ve been used to cut taxes.

Implied in the Ryan plan was $883 billion in revenue reductions meaning taxes were going to be cut. Therefore, saying the GOP is going to stop working on healthcare and move to focusing on tax cuts is like saying the GOP failed to cut taxes through healthcare, so now it will cut taxes through reform with a new tighter window because of less spending cuts. As a reminder, the tax reform process was not smooth sailing the last time it was debated. There are major disagreements within the party over the boarder adjusted tax. The lack of a healthcare plan makes the size of potential tax cuts smaller and the chance of them passing less likely.

Conclusion

My bearish thesis that fiscal policy will provide less of an economic boost than expected is looking strong. This thesis is combined with my thesis that earnings growth will be lower than the 9.8% which is expected. Even with both heading in the correct direction, stocks are near record highs.

I was wrong in my prediction that the Fed wouldn’t raise rates in 2017 as the Fed raised rates once in March and is preparing to raise them two more times. The million-dollar question is whether the Fed will recognize that the fiscal policy boost it expected to occur won’t happen. The follow up question is whether the Fed’s understanding that fiscal policy won’t boost the economy will cause it to become more dovish. Keep in mind that the Fed being more hawkish than I expected is bearish for stocks. Both my correct and incorrect predictions led to negative results. I don’t see any reason to be invested in stocks now.

Spread the love

1 Comment

  • L2SGO

    March 25, 2017

    This thesis though makes sense but I find will create an opportunity for Trump to reach out to democrats in getting a better or more beefed up universal health care for Americans on the long run and not get bogged by traditional DC politics. My guess is President will reduce overseas funding of foreign countries and also reduce involvement in Middle-East. However, the looming issue with North Korea may get us involved in Asia but Japan and South Korea will have to pay for this involvement. Enjoy your articles.