Trump Train At Crossing
The Trump Train comes to a grinding halt as drama builds over the potential failure of the American Health Care Act, otherwise known as Obamacare replacement, to make it out of the Republican-controlled House of Representatives.
If it bill fails the ramifications would be wide and far.
Replacing Obamacare is the linchpin of the Trump Agenda and has to happen before other parts could be achieved. In addition to almost $1.0 billion in tax savings, removing roadblocks to small business growth and lowering the federal debt, the passage of the bill would signal smooth sailing on all other parts of Trump’s economic initiatives.
The root of this spectacular improvement in business and consumer confidence is the belief that the wheels of commerce will be lubricated with lower taxes, fewer regulations and having a cheerleader for success and optimism in the White House.
I honestly don’t think Wall Street cares what a final Obamacare package looks like they just want it over and done. The Freedom Caucus and others, however, are very serious about their stand –see sidebar.
Ultimately the stock market revolves around corporate earnings and while I look for companies that are growing the top line organically with pricing power, expanding margins and taking market share, lowering taxes would instantly fatten bottom lines.
This is why the Street yearns for President Trump’s tax cuts which could go as low as 15% (but I would take 20% and no broader adjustment tax).
Some models suggest an automatic increase to S&P 500 earnings of 9.5% at the 20% top rate and 12.5% if the rate got to 15%.
Tax Reform Impact
S&P Earnings Boost Corp Tax Bracket vs Earnings Addition to S&P 500
32% = 0%
30% = +3.5%
25% = +6.5%
20% = +9.5%
15% = +12.5%
Source Larry McDonald
Yesterday, utility stocks were up big as investors retreated to safety but over the long run the inability to lower corporate tax rates could have a deleterious impact on consumer staples and discretionary stocks.
Beyond the fact this was the first broad market decline of more than one percent in 64 trading days, which was the best streak in 50 years, key “Trump stocks” and sectors really took it on the chin.
The Wall and infrastructure darlings got hammered:
Dodd-Frank financial reform names:
Key Support Points
The market was due for a pullback and I’ve tried to prep everyone with my commentary. Those that just got back in the market and are afraid thinking I’m not “sophisticated” are going to blow it by taking unnecessary losses.
Key support for the S&P 500 hits 2,278
Key support for the Dow Jones Industrial Average hits 20,100
I like it when stocks go on sale although modelling a sharp reversal lower in sentiment makes everything more difficult.
On that note, I see the majority of President Trump’s polices going into effect but the realities of Washington mean that it may not be smooth saili
The fact is that the market is never smooth sailing for long but fortunes are made when others are panicking. This ride has just begun and this show down might mean smarter bills and organization in the future. I’ve been asking everyone to keep their powder dry and be ready to pounce. The good news is very few are panicking or stampeding out the market.
As for the buy signal - if there is clear resolution to the Obamacare drama today we would be looking to buy but more than likely this comes down to the wire tomorrow night.
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