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If Tax Bill Fails, How Far Over Our Skis Are We?

Zacks

Friday, December 1, 2017

If the GOP tax bill fails, how far over its skis is the current stock market? CNBC’s Jim Cramer says 500 points will come off the Dow instantly. Others more or less concur. Even Treasury Secretary Steve Mnuchin warned that if a tax bill is not passed, market participants can expect a major pullback in equities.

Keep in mind that even if Republicans in the Senate are able to right their ship in short order, coming to terms with the vastly different House tax reform bill will require even more heavy lifting. And with the track record of this Congress so far — a total of zero major legislative passages in the 10 months since the 115th U.S. Congress convened with President Trump in the White House — miracles appear to be hard to come by.

The markets have been speculating for most of 2017 that a big corporate tax cut was inevitable, and soon. Even with missteps in immigration reform and repealing/replacing Obamacare, analysts have routinely seen tax reform through a different lens: lower taxes as an issue is veritably bonded to GOP DNA; this was a more important issue for Republicans in Congress, and especially its campaign donors, who tend to be extremely wealthy individuals who now earn the majority of their income via Wall Street investments.

Good news for the tax reform plan is just hitting the tape at this hour: Wisconsin Senator Ron Johnson, who had dramatically voted “no” yesterday afternoon on the Senate floor after passing the bill through committee earlier in the week, has switched his vote to “yes.” Johnson says his conditions were met in private session this morning, making the hurdle for Senate passage — all yes votes are from the Republican party, by the way; no Democrats support it — a bit easier to clear. We shall see if this greases the wheel for other GP holdouts.

Those include Tennessee’s Bob Corker and Arizona’s Jeff Flake, both who have indicated they do not plan to run for re-election, and thus cannot be swayed by leaders of the Republican party to tow the line. Both men also consider themselves “deficit hawks,” and with reports from the CBO last week and the Joint Committee on Taxation yesterday indicating the bill in its current form would rip a hole of between $1-1.5 trillion in the country’s debt. Importantly, contrary to Secretary Mnuchin’s claims that the tax cuts would pay for themselves over time, even the best-case scenario demonstrates the benefits to the economy would come up well short of this goal.

Montana’s Steve Daines represented another question mark until this morning, when he also said he would bring a “yes” vote to the floor. Still up in the air at this hour are Susan Collins of Maine — who has expressed concerns about state & local tax restructuring under the plan — and James Lankford of Oklahoma — another deficit hawk. The Republicans only need 50 votes to secure passage, with Vice President Mike Pence representing the tie-breaker, but the numbers still don’t look to be adding up. They’re close, but not quite there.

For those worried that the stock market stands to take a major beating if this latest tax proposal fails, keep in mind the U.S. economy is the strongest we’ve seen, across the board, since prior to the Great Recession nearly a decade ago. Consumer confidence, the domestic labor market, business investment and still-manageable inflation again making the U.S. economy the shining beacon on the hill. Even without corporate tax reform, companies are still making more money than ever before, and, of course, their stock valuations prove it.

So even though indexes would stand to take a hit if tax reform doesn’t happen — and let’s not lose sight that the GOP still has reason to be hopeful it will — don’t expect markets to plummet the way they did when the mortgage crisis hit in late 2008. This is a wholly different animal, and one that does not look to ravage our portfolios the same way.

Mark Vickery
Senior Editor

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