Roll out the red carpet, this is what investors have been waiting for: Donald Trump talking to Congress. We know he will complain about delayed appointments and the media, but what will we learn about regulation rollbacks (Affordable Care Act, for instance), tax cuts (this year, please), trade and infrastructure spending? The reactions he gets from his party are just as important as how he delivers his message and makes his point for urgency on the tax front, and clarity on how the government will fix “Obamacare”.
Trump speaks to congress at 9pm EST later today.
Treasury Secretary Steve Mnuchin said this weekend the speech will cover tax reform. Everyone is waiting for these ‘phenomenal’ tax cuts and investors will be disappointed if details of tax cuts are vague. Reports at the end of last week suggested that tax reforms, presumably cuts in corporate and income taxes, might not happen until August. Plans for infrastructure spending amounting to $550 billion could be pushed into next year, an election year. Bad idea. This is a sell sign.
Trump is also undecided about the proposed 20% border tax with Mexico. Such a tax is seen pushing the dollar higher against the peso. A smaller trade deficit means a lower capital account surplus which, in turn, means higher interest rates and lower equity market returns, notes VTB Capital in London in a note to clients yesterday.
Investors are starting to price out the ‘Trump-flation’ trades. Retail investors are arriving to this party way too late, with the relative strength on the big S&P ETF, State Street’s SPDR S&P 500 (SPY 515,71 +2,85 +0,56%) indicating it is overbought. There is a chance that a lower regulatory burden on banks, if Trump addresses that and we all learn when this is coming, helps keep financials going. The Vanguard Financials (VFH 99,83 -1,13 -1,12%) ETF is up 5.2% this year.
John Hussman of Hussman Funds says equities are in an “extended top-formation of one of the most extreme valuation extremes on record, now eclipsing the 1929 peak.” Well, alrighty then…
Sound the alarm?
The economy is estimated to be growing at a 3.1% annualized rate, according to the New York Federal Reserve. The Fed is looking to implement three 25 basis point hikes, the first one coming on March 15. It’s already priced in. Trump’s address tonight is unlikely to change those variables.