Look, here’s the thing: until somebody actually gets something done on the tax reform front, markets aren’t going to believe it.
Over the past couple of days, we’ve variously suggested that Treasury Secretary and human-turtle hybrid, Steve Mnuchin, was simply trying to blackmail lawmakers when, in a podcast with Politico, he said the following:
There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done. To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains.
That last part (about stocks falling in the event nothing gets done) is probably more true than the first part. In the event the tax effort crashes and burns and stocks subsequently fall, that’s going to be more a reflection of everyone finally throwing in the towel on the entire Trump agenda than it is everyone suddenly pricing out some specific tax reform premium they had previously priced in. Whatever you want to look at (e.g. high tax rate stocks, the curve, the dollar, value vs. growth, the Russell vs. the S&P etc.) the tax reform trade has been faded aggressively all year with only intermittent bouts of reflation optimism.
There’s one possible exception and that’s Goldman’s basket of companies with the highest small and medium business exposure. You can read more about that here, but I think the balance of evidence suggests record highs on benchmarks don’t have much to do with tax cuts.
This is an important issue for obvious reasons and indeed, you can even make a bull case out of it if you’re so inclined. That is, if equities really aren’t pricing this in, well then that means there’s considerable upside if/when something gets done.
Anyway, that’s a rather long-winded way to introduce something simple, but that’s kind of how shit works here at HR. Here’s BofAML with a quick, but useful, note:
Contrary to the post-election moves, the trend has been that the markets have become increasingly unimpressed by Congress’s effort to push forward on tax reform. Relative to the 50bp sell-off in the two weeks after the election in 2016, the incremental sell-off in April (when the one-page tax reform outline was introduced) , late September (introduction of the nine-page outline), and late October (when House passed the Senate budget bill) have been much less (Chart 4). This suggests to us a “seeing is believing” mentality in the market.