The stock market was down modestly on Friday as the S&P 500 remained within the recent trading range it has been in. The bulls have prevented a 5% correction, but the market hasn’t made a new closing high since March 1st. The pace the market was rallying at earlier in the year was unsustainable. There was always very little chance the market would rally +25% this year given how expensive valuations started the year at. The bulls will describe the latest action as a sideways correction, while bears will say it’s part of the topping process.
While the market is expensive and economic growth is barely existent, the bulls had positive fiscal legislative news to bank on this week. Both the healthcare plan and the tax reform plan appear to be headed in the right direction. The market cares more about what will likely happen, than the specific timing of the plans. Besides discussing these plans in this article, I will also review the debt ceiling situation.
The news on tax reform is less granular than the news I will discuss on healthcare reform, but it’s arguably more important to the stock market. As I said, the two biggest keys to this plan are whether the boarder adjusted tax is in it and what method is used to pass the bill. I’m expecting the boarder adjusted tax to be in the bill because President Trump said businesses and individuals will receive a "massive tax cut." He was quoted by the Associated Press as saying the tax cut will be "bigger I believe than any tax cut ever." The only way for the tax cut to be large would be for the border adjusted tax to be included in it. This may make it tougher to pass through Congress, but I think it has a better chance than Ryancare had because the low rate will appeal to conservatives. It will be tough for the Freedom Caucus to oppose a tax cut.
The method of the bill’s passage will be important because it determines how easy it will pass and if it will be temporary. The best plan for the market would be a permanent tax cut passed through a budget reconciliation which needs a simple majority in the Senate opposed to 60 votes. The rules are wonky, so I’m not sure how the scoring will work. Specifically, the plan needs to pay for itself to be passed under a reconciliation, but if the rate is lowered, it’s tough to make the plan pay for itself. This is where dynamic scoring comes into place. Clearly more business activity will occur because of tax cuts. The question remains how much extra activity will happen because of tax cuts. The Congressional Budget Office is supposed to be a nonbiased organization. We will see how they score it when the plan is released by the White House.
I may have been wrong in my assertion that the healthcare plan pushed back tax reform because President Trump said a tax reforn plan will be released as early as Wednesday. If the healthcare plan and tax reform were worked on simultaneously, they may be passed within a few weeks of each other. Treasury Secretary Steven Mnuchin said the goal of getting tax reform done by August won’t be achieved, but it may happen by the end of the year. Stocks priced in immediate tax cuts before Trump was sworn in. Then they backed off because immediate action wasn’t taken. Stocks may rally to new highs if the initial plan proposed by Trump gets support from moderate and conservative Congressional Republicans.
The healthcare plan looks to be on strong footing after the initial slip up as the moderates and the conservatives have come together to support what is being called the MacArthur amendment to the American Healthcare Act. The plan has been said to have garnered 18-20 new yes votes from the Freedom Caucus. There haven’t been complaints being flung by Rand Paul who was the leader of the charge against the first attempt. Conservatives weren’t included in the discussions over Ryancare. Now that Mark Meadows, the chairman of the Freedom Caucus, put his stamp of approval on it, the plan looks ready to be enacted.
As I said in a previous article, the most important aspect of the plan is the limited waiver requirement to allow insurance companies to raise prices for those with pre-existing conditions if the state sets up its own high risk pool or uses the federal high risk pool. Democrats will argue these high-risk pools are often underfunded, but it’s the best plan to avoid having those with pre-existing conditions raise prices for everyone.
The concept of a government shutdown seems highly unlikely given the fact that the GOP controls the two branches of Congress and the presidency. The White House has started to prepare for a shutdown, but that’s just a precautionary measure. The government will shut down if Congress can’t agree on a spending bill by April 28th, but Congress can easily pass a short-term spending measure which kicks the can down the road to the fall. The deadline has always been in the fall, but media outlets like to put out misleading headlines to garner clicks. Investors shouldn’t be concerned with the deadline until the late-summer. Fiscal conservatives may push for some spending cuts before a deal on the debt ceiling is made, but they probably won’t bargain too hard because the American Healthcare Act should provide cuts in the growth of spending on healthcare. The debt ceiling deadline may occur before the healthcare plan is finalized, making it into an afterthought for most legislators.
Conclusion
The stock market had a good week because the GOP appears to have made progress in passing the American Health Care Act and tax reform. The plans have hit snags along the way, but they finally look like they are taking shape. The most critical news that will come out soon is whether the President’s tax reform plan has a boarder adjusted tax in it. I expect it to, but I could be wrong.
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