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Could Tax Reform Delays Tank the Market?

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Wednesday, October 18, 2017

We interrupt this early cycle of Q3 earnings season for an important message — really, two messages: one from President Trump and one from Treasury Secretary Mnuchin — regarding potential tax reform. This is arguably the market’s greatest catalyst, which helped the Dow Jones surge past 23,000 for the first time ever yesterday, so anything either of these men have to say about tax reform should likely be considered seriously.

At a press conference yesterday, Trump said Congress has “a long way to go” on tax reform, noting that it took President Reagan’s massive tax reform overhaul in the 1980s two full years to pass both houses. “I’ve only been here nine months,” said the president. For somebody who typically has no problem issuing big, sweeping statements — especially regarding the grandeur of his various enterprises — this note of caution might signal a delay to extensive tax reform being actualized.

In context, this first nine months of Trump’s presidency has been marked by several missed opportunities on major policy shifts from the Obama administration: the inability to repeal and reform the Affordable Care Act, no progress on the giant wall expected to be built along the Mexican border, and just yesterday, a federal judge blocked — for a third time — Trump’s travel ban for citizens from a handful of predominantly Muslim countries. In fact, the only successes Trump can count so far are those where he achieved bi-partisan support, which is highly unlikely to be the case for tax reform.

Secretary Steve Mnuchin was even more frank regarding tax reform passage in an interview with Fox News yesterday. While he did say it would be “extraordinary” if Congress could pass a tax bill before the end of the year (and House Speaker Paul Ryan has already threatened to suspend Congress’ winter holiday in order to push some tax legislation through), Mnuchin also quipped, “If we don’t get it done, you’re going to see a reversal of a significant amount of these gains [in the stock market].”

Remember, these remarks come from arguably the two biggest proponents of tax reform in the nation’s capital. So if they don’t believe it’s going to happen — and if Mnuchin is correct that failure to pass a tax deal will result in a sell-off — why should the rest of us be so certain it will, and should we be worried?

That said, market participants have plenty of Q3 earnings reports to parse through, which has been the strongest catalyst for stock index gains over this long multi-year rally. Most notably, IBM Corp.’s (IBM - Free Report) big upswing following its pleasing Q3 results after the bell yesterday has given a strong boost to Dow futures at this hour. Big Blue finally looks to have managed a turnaround in its various businesses on track for stronger quarters ahead, even though the company has now reported 22 straight quarters of revenue declines. Also, one analyst pointed out IBM’s extraordinary negative tax rate of -23%, non-operational gains that may suggest the tech staple still has a ways to go overall.

Mark Vickery
Senior Editor

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