The lengthy effort to pass the health-care bill may not matter after all to the stock market,
Regardless of whether Republicans can push the bill through, pro-growth and economic policies appear to be next on the agenda.
If so, markets win either way, say analysts such as Evercore ISI’s Terry Haines.
“They are not willing to hold economic growth/tax reform hostage to ACA reform any longer: we think this is a broad market-positive signal that bolsters our case for 2017 tax reform,” Haines wrote in a note to clients Friday. “Whether today’s ACA vote is up or down, tax reform will start to take center stage this spring.”
U.S. stocks were thrown for a loop Thursday, oscillating between gains and losses as health-care headlines dominated the trading session. The S&P 500 Index finished 0.1 percent lower on news that the vote would be delayed until the next day. Yet stocks opened higher on Friday, with the gauge advancing 0.4 percent at 11:14 a.m. in New York.
For some, the push by House Speaker Paul Ryan on the embattled health care bill is just noise. The expectation is they will soon pivot to tax reform. Getting Friday’s vote out of the way, win or lose, would allow the Trump administration to move on to policy largely viewed as positive by the markets.
A year’s worth of campaigning on taxes and economic growth leaves little doubt about Republicans’ enthusiasm for deregulation and tax reform. Part of the issue, however, comes down to timing and whether the difficultly passing health care reform diminishes the administration’s prospects for pushing through future legislation.
‘Doesn’t Make Sense’
For UBS Group AG strategist Julian Emanuel, the idea that health bill’s failure spells doom for the rest of the Trump agenda “absolutely doesn’t make sense.” Though it could take until the beginning of next year, the legislative support for U.S. stocks isn’t disappearing, he said.
“Yes, today is important, but it’s not the be all and end all,” Emanuel said in an interview on Bloomberg TV. “Even if this bill doesn’t pass, there’s still impetus for less regulation rather than more. Support of financials and tax reform is not a dead idea.”
But not everyone is as sanguine.
“If they fail at this then the prospects for tax reform, infrastructure and defense spending will need to be rethought,” Steve Ricchiuto, chief U.S. economist at Mizuho Securities Inc., wrote in a note Friday. “The reflation trade has been the main driver of markets since the election and the legislative failure after bungling the immigration executive order.”
Ricchiuto believes that if the health-care bill fails the S&P 500 will fall as much as 4 percent from Thursday’s close and yields on the 10-year Treasury to drift back toward 2.2 percent. Yields edged higher past 2.4 percent on Friday.
Doubts about the timing of tax reform are creeping into the equity market. Companies that benefit from a corporate tax cut surged after Donald Trump’s election, but have started to lag. A Goldman Sachs Group Inc. basket of 50 S&P 500 stocks with the highest effective tax rates has fallen 2.8 percent so far this month, compared with the lowest tax basket, which is unchanged.
Bank stocks, which also stand to benefit from tax reform and deregulation, have also taken a pause after posting their longest monthly winning streak since 2013. Financial companies in the S&P 500 slumped 3.3 percent since March 17, heading toward the worst week in over a year.
There are “several implications for bank and financial stocks as well as the broader market in case the House defeats the bill,” wrote Brian Gardner, an analyst at Keefe, Bruyette and Woods Inc., in a note to clients Friday. “If the bill fails, the prospects for tax reform will decrease, which could also drag down the chances for making legislative changes to Dodd-Frank.”
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