Positive economic expectations for proposed tax and infrastructure legislation took a decided reversal last week. The reversal resulted from various issues that would likely undermine the administration’s ability to push through this legislation—particularly tax reform. Investors look to these proposals to provide additional stimulus for economic growth.
The Fed and the Trump Bump
The Fed may also be disappointed. It finally expected to handover economic stimulus programs from their fully exploited monetary policies to these new fiscal policy initiatives. How the possible absence of such initiatives may affect the Fed’s future policy actions will likely show up between now and year-end.
Congress May Come to the Rescue
With the uncertainties overhanging the President and the resulting greater pessimism concerning tax reform, ironically, the positive investment surprise may prove to be passage of tax reform—or likely, just a corporate and individual tax cut. Certainly, Republicans facing the 2018 mid-term elections need to show voters they accomplished what they promised. Passing tax reform may be one way to achieve that.
Health Comes Before Reduced Taxes
Tax reform must await consideration of health care reform. With solid democratic opposition, republicans must use the FY2017 budget reconciliation process to pass their health care proposals. The key point, healthcare reform must be considered first – either passed or scuttled—before considering tax reform. Only then can tax reform be moved forward using the following year’s FY2018 budget reconciliation process.
The Missing Ingredient – Republican Unity
For such progress to occur, Congressional Republicans must demonstrate the missing ingredient so far – unity. A quote from early in the last century shows similar issues as today. A humorist of that earlier period, Will Rogers, remarked, “I belong to no organized party, I am a Democrat.” I suspect that quote now applies to today’s Republicans.
In the house, the split shows up between the most conservative budget hawks and their more moderate Republican colleagues. The split also exists between Republicans in the house and those in the Senate. Quoting Will Rogers once again, he said “ancient Rome declined because it had a Senate, now what’s going to happen with both a Senate and House.” Proving little has changed in the last hundred years.
Investors now expect little from Washington in the form of fiscal policies to stimulate economic growth. Therefore, investors will likely refocus on companies that can overcome the shortage of economic growth. With their growth characteristics, tech stocks will continue their out performance – until one stumbles. At the same time, the business cycle moves into its more mature but expansionary phase in this country. This should favor industrial and other companies that show strength in this stage of the business cycle.
Internationally, global economies show increasing strength. Therefore, beyond tech, U.S. global industrial and capital goods companies will benefit from international strength. For example, last week, one U.S. global agricultural equipment company reported that first quarter domestic earnings declined about 5%. At the same time, their non-U.S. earnings showed an increase in the mid-teens. More of this global strength will likely show up in the earnings mix for other U.S. global companies.
Finally, there remains little expectation for legislative progress in Washington this year. Therefore, forward movement in tax reform legislation might provide a market “bump,” but with greater investor wariness.
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