Over the weekend, Goldman Sachs strategists published research taking a more realistic view on the timing and impact of Trump’s agenda, stating, “The most obvious development is simply the slowing pace of policy actions and expectations of further delays. Over the last month, market participants have shifted their focus away from the series of executive orders the President released shortly after inauguration and toward congressional debates on health care and tax reform…prospects for speedy resolution of either issue have faded.”
The research published by Goldman is consistent with our view that the timing and ultimate substance of Trump policy changes may ultimately be disappointing vs. what investors have currently priced into the stock market. Investors are currently expecting fiscal stimulus in the form of significant tax cuts and infrastructure spending and have ignored the possibility that we may not get fiscal stimulus until late this year or 2018 and have also ignored the possibility that the ultimate size of fiscal stimulus is lower than expected.
Here are a few of the upcoming policy debates in DC:
Affordable Care Act – the current House healthcare plan appears to be based on tax credits to assist lower income individuals to purchase healthcare. Conservative Senate republicans have expressed opposition to supporting a healthcare bill that essentially establishes a new entitlement. If the House votes on a healthcare bill by the end of March, it may take a few weeks for the Senate to send a bill they are happy with to the President. The timing of the ACA repeal and replace is important since Trump and the Congress have communicated that tax reform will follow the ACA repeal.
Tax Reform – with an optimistic timeline for ACA repeal set in late April/May, we may not see any progress towards a workable tax reform bill until much later in 2017. And as mentioned in a prior post, many Republican senators have expressed opposition to the Border Adjustment Tax. The House leadership has insisted that the BAT is the cornerstone to raising enough revenue to pay for reduced corporate and middle income tax cuts. It appears the tax reform debate is setting up to be a difficult and long process.
Infrastructure – with the ACA and tax reform on track to dominate the 2017 legislative schedule, who is actually going to get time to focus on an infrastructure bill?
This brings us back to the current dilemma – how will the market react if we get no tax reform until the end of 2017 and no infrastructure spending until 2018? And how will the market react if the substance of the tax reform only creates a modest reduction in taxes?
Disclaimer– This article is for informational purposes and does not constitute financial or other advice. Please consult with your financial advisor before making any investment decisions. Please read full disclaimers here.