Is Trump Tax Agenda Still Possible?
Stocks declined for the second straight week. This is the first time we’ve had consecutive down weeks since May. For the week, the Dow declined 0.8% while the S&P 500 was down 0.6%. All the week’s losses occurred on Thursday as the Dow was down more than 1% for the first time in 63 trading days. It was a tumultuous week for the President and rumors yesterday suggested that Gary Cohn, Director of the National Economic Council, might leave the administration. Many market participants think highly of Mr. Cohn and fears rose that if he left, other pro-business members of the administration could leave as well. Today, Steve Bannon, the controversial Trump advisor stepped down. This calmed markets because it increases the likelihood that Cohn and others will remain.
All of this gets to corporate tax reform. One of the larger questions about the market rally this year is the extent that future tax reform is already priced in. Are current stock valuations based on current earnings and fundamentals or are investors already pricing in higher earnings going forward based on lower corporate taxes? If it’s the latter, any change in expectation about tax reform should cause a market sell-off. Corporate tax reform should be a relatively easy issue. We have, by far, the highest corporate tax rate in the industrialized world. We are also the only country that taxes global earnings instead of simply US earnings. Most politicians on both sides agree we need to make changes, but Republicans can’t seem to put a plan together and Democrats seem to think ‘doing nothing’ is their best political move. I think the market is expecting, at best, a 50% chance of meaningful tax reform. Nothing about the way DC has functioned in the last nine years suggests a big, bipartisan compromise will happen. Corporate earnings have been good, the economy is reasonably strong and stock prices continue to look attractive relative to bonds. Those factors give me confidence that there is support for the market’s gains this year even if no tax reform occurs.
Oil declined again this week, dropping 0.3% to close at $48.63/barrel. The yield on the 10-yr Treasury remained steady, closing at 2.19% again this week. The average rate on a 30-yr fixed rate moved slightly lower this week, to 3.89% from 3.90% last week.
|10-yr Treasury (∆ in bps)||2.19||0||(26)|