Tax Reform (Tax Cuts): A Pipe dream?

Considering the immense legislative successes that we’ve seen in the first eight months of the Trump administration, it is not hard to fault Wall Street’s new all-time high price reaction to the introduction of the administration’s New Tax Plan (The Unified Tax Reform framework). Wait a minute … let me see … what exactly were those accomplishments? Okay, yes, a compromise with the Democrats that allowed an increase in the debt ceiling preventing a government shutdown. And compromise is a real accomplishment in this era of hyper-partisanship. On this I give the president due credit.

All kidding aside, I have asserted many times that even with a majority in both houses the Republican president’s progress on healthcare reform, infrastructure and tax policy would be a very tough slog, that it would not be a fait accompli . See “Wall Street, we have a problem”— November 21,2016 and “Trump Bump on The Way To Trump Dump.” So, again on the subject of Tax Reform, I reiterate it is going to be a very tough slog. And based on the president’s affinity to step on his own message via mis-statements and needless unrelated conflicts, like healthcare reform, it may not happen.

A valued source, Jeff Miller, gives his take below:

Trump Tax Reform Proposals (Weighing the week ahead — Jeff Miller — 10-1-2017) 

“Everyone is taking this plan seriously. Every firm has a research team that will instantly tell you the effect of the proposals on you, the general public, income inequality, and anything else. Each media source has a story ready to run, just as they do for obituaries on old folks. This is not analysis; it is jumping the gun. Since the election the major Trump discussion has focused on the effects of his policies. People rushed to buy “Trump Stocks” and attributed stock moves to the “Trump Rally.” Few noted the low probability for adopting these policies.

Even Barron’s Randall Forsyth, the object of many a kortessions’ barb, got it right in this week’s Up and Down Wall Street, “Wall Street Counting Its Tax-Cut Chickens Early.” (you need a subscription to view)

Yet, many continue to ascribe the market’s success to these very policy initiatives, totally ignoring less-than-stellar legislative results since the inauguration.

Should you be worried?

NO. First and foremost I believe that the market caught wind of this legislative paralysis early in the game … probably right after the election (not a new opinion for me if you check out my earlier posts). The Trump administration, moving from self-created to  self-created crisis has no focus. The Republican majority is split between philosophical conservatives and the “Tea Party Caucus.” On the conservative side you have thoughtful members who will compromise to govern. On the ‘Tea Party” side you have doctrinaire, my-way-or-the-highway types who would rather blow up the party than find a middle ground answer to solve a problem. Ergo, even with the White House in their control and a legislative majority they can’t govern. Thus, there will be no new rules for business to operate under. I think for business this is a benign operating environment, as businesses seem to be doing quite well operating under the rules as they are. And as I’ve mentioned before, the removal of regulation that occurred during the early days of the administration may already be applying a substantial tail wind for business and the economy.

None of this means the we are immune from having a substantial correction. This would be normal and easy to call for based on the terrific correction-free run that we’ve enjoyed. But my opinion remains that we are in a secular bull market and that there continues to be significantly more upside over time.

The Economy and Valuations

Both the economy (US and Global) and valuations look fine to me especially in the context of benign inflation and a 2.3% ten-year Treasury. I do not subscribe to Shiller PE. I am not going to reinvent the wheel on this post trying to include additional data in my commentary. If you are looking for a deeper dive “than trust me the economy and valuations look fine,” I would point you to another valued source, “Fear and Greed Trader.” FGT provides an excellent weekly digest including economic, valuation and technical commentary.

Back to tax reform, my gut tells me because of the complexity of the issues involved and prior evidence of gridlock on the part of the majority in Congress that it may very well be a pipe dream. However, in the context of the secular bull market, this is okay. 

What’s your take?

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