Donald Trump likes to say that people “have gotten him wrong” from the start.
When it comes to markets, that’s almost undoubtedly true.
A fleeting futs plunge notwithstanding, equities were ebullient with Trump’s surprise election victory in November and that enthusiasm showed up in all manner of “Trump trades.”
Unfortunately, being President is hard – something that wasn’t readily apparent to Trump before late January.
So yeah, the market “got Trump wrong.”
Then, following the initial failure to “repeal and replace,” the market got Trump “wrong” again. This time, everyone was so down on Trump that they began to price in things that made no sense. For instance, traders were actually betting the tax situation would get worse in America, an outcome which on the surface at least, seems to be impossible (that is, either the status quo changes, or we get tax reform):
The market was thus “wrong” again. Trump and the GOP did manage to get the American Health Care Act past an initial House vote, something that investors seemingly thought was all but impossible just a few weeks ago.
Well, now the market has got Trump “wrong” a third time. Because thanks in no small part to the fanfare surrounding this week’s healthcare vote, everyone seems to have forgotten about the fact that “repeal and replace” is still far from being realized. We contend that just glancing at the benchmarks on Thursday and Friday isn’t the best way to think about how jubilant the market is. You have to think about it in the context of this week’s commodities carnage. There’s an argument to be made that we would have seen a veritable bloodbath in equities were it not for the fact that the market was distracted from the metals mayhem by the “win” on Capitol Hill.
So, traders and investors (note that those are two distinct classes of market participants) now need yet another reality check. Here to deliver just that is Goldman, who notes that contrary to what people seem to think, tax reform has now been pushed out further.
House Republicans have passed their American Health Care Act (AHCA), moving repeal of the Affordable Care Act (ACA) one step closer to reality. However, while the House vote was necessary for ACA repeal, it is far from sufficient, and the process is likely to become harder after this first step.
House passage increases the likelihood that health legislation will be enacted this year, though it still faces several obstacles. In the meantime, uncertainty regarding insurance regulation and subsidization could lead to lower enrollment and plan participation in the existing system, which has already struggled with weaker than expected enrollment and declining plan options.
In isolation this legislative victory is likely to be interpreted as bullish for other aspects of the agenda, including tax reform, as it demonstrates that congressional Republicans may be able to form a working majority on controversial issues after all.
However, the revival of health legislation, which could at least take a few more months to conclude, could substantially delay consideration of the remainder of the legislative agenda. This further reduces the likelihood that Congress will enact a tax cut before year-end, in light of the additional steps that would be necessary once the health bill has been enacted.
While we continue to believe that tax legislation is likely to be enacted in early 2018, further delays could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years.