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.
