The markets appear none the worse for wear following the withdrawal of the rewrite of the Affordable Care Act on March 24th.
As expected, major stock markets all suffered heavy selling pressure immediately after the defeat: The Dow was left nursing triple-digit losses of 170 points, while the S&P 500 and Nasdaq opened 20.3 and 53.7 points lower, respectively, on Monday trading. That marked the worst one-day drop by the markets in five months.
Luckily for bullish traders, the markets have snapped back from the slump after just two trading sessions.
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S&P 500 Index (SPX) 5-Day Returns
Dow Jones Industrial Average (DJIA) 5-Day Returns
Nasdaq Composite Index (COMP) 5-Day Returns
Interestingly, the fallout resulting from failure to repeal Obamacare weighed on European markets as well, with London’s FTSE 100 losing 0.6pc; Euro Stoxx 600 tumbled 0.4pc and German DAX fell 0.6pc.
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Strong market momentum
The impressive comeback by stocks clearly shows that the momentum in the markets, a hallmark of the Trump Trade, remains as strong as ever.
For the markets, failure to rescind the healthcare bill will only have short-term ramifications, but will not have nefarious effects on more important bills, such as tax reforms and infrastructure spending to the tune of $1 trillion.
Although the Republican gridlock remains a major threat to the remaining bills, there is generally more agreement on tax reform than there ever was for the healthcare bill. House speaker Ryan has crafted a template for tax cuts that calls for paring back personal income tax brackets from the current seven to three, lowering top individual tax rate from 39.6 to 33 percent and trimming corporate tax from 35 to 20 percent. Trump’s version is pretty much the same as Ryan’s, the only difference being he has proposed bringing corporate tax even lower, to just 15 percent.
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Both Trump and Ryan want to entice American companies to bring back home at least part of the $2 trillion they have stashed in overseas accounts. To make up for the tax cuts, Ryan has proposed a border adjustment tax that will slap a 20 percent tax on imports and zero on exports. Trump, on the other hand, has proposed to spend $1 trillion restoring things like decrepit roads and bridges. That kind of adrenaline shot to the economy has had Wall Street salivating.
Risks to the bullish thesis
For all of its attractions, enacting a new tax bill is not going to be a walk in the park. Treasury secretary Steve Mnuchin recently said that the administration has a target to pass the new tax plan before Congress goes on recess in August. Wall Street is, however, far less sanguine, with a recent Bank of America Merrill Lynch survey revealing that only 10% of fund managers believe that the tax bill will be passed before the August congressional recess. It’s been decades since the last full-fledged tax reform was passed in Washington. The last major tax revamp of 1986 took more than 12 months to complete. So, basically, there’s little hope that this piece of legislation will see the light of day as fast as many investors would probably hope for.
Then there is the nagging question of how to pay for those massive tax cuts. The proposed border tax would certainly help, with estimates that it could bring in approximately $100 billion to the economy every year. But such a tax would also lead to higher prices for goods and services and even harm retailers. Trump has already expressed his skepticism about the new tax. This is likely to create another snag during congressional negotiations.
Markets likely to remain resilient after healthcare drubbing
The S&P 500 is currently trading above 2,273, which is the 100-day moving average. This shows that investors have been using the recent sell-off as a buying opportunity. There is still a lot of optimism in the markets, which is to be expected, since numerous economic indicators remain positive– consumer sentiment is healthy, wages are higher, corporate earnings are on a recovery path, oil prices are stabilizing and business capital spending is expanding.
The economy is clearly getting better and that might be enough to outweigh any turbulence from Washington, even if there are delays in the enactment of tax reform and infrastructure stimulus bills.
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