Is air leaking out of the balloon?
In the November election, once the markets digested a Trump victory it liked what it was hearing, and from that election day till the end of February the S&P 500 has jumped almost 15%. A 15% rise in under four months is impressive.
The market priced in a ‘deal maker’ president, and loved the idea of slashed regulations, lower corporate and personal taxes, along with a massive infrastructure spending program.
But since the end of February the markets have started to see some air leaking out of the balloon. Last week’s failure to replace Obamacare is the latest event that has the markets now wondering how soon will it be until we see the positive impact of lower taxes, slashed regulations, and that massive infrastructure spending program? Investors have answered those questions by moving capital out of the stock markets.
Some of that capital has been flowing into bonds.
Some of that capital has moved into gold.
And some of that capital has moved into Emerging Markets.
Tax reform was a big ticket item for Trump and in order for him to dramatically lower corporate and personal taxes, he needs to get funding from other sources to keep his budget from going out of control. Repealing Obamacare was to be a major source of that funding, and another was to be the Border Adjustment Tax (BAT) that his administration has been proposing.
According to the Congressional Budget Office (CBO) a nonpartisan analysis of congress, a repeal of Obamacare would remove close to $500 billion off the deficit. The Border Adjustment Tax was supposed to bring in $1 trillion in new revenue, but lately Trump is being challenged by the House Freedom Caucus, who have concerns with this action.
So in the short term, the anticipated $1.5 trillion in extra revenue to offset tax cuts will be a challenge for the Trump administration. The market wants those tax cuts, infrastructure spending, reduced regulations, and economic growth. Right now the market is concerned that these changes are being stalled.
A market correction here is something that we have been calling for. In fact on February 28th we sent subscribers an insurance trade to protect them for this very situation.
Ultimately, Trump may not get tax cuts as deep as he wants, but there will be tax cuts. As Mark Meadows, leader of the House Freedom Caucus stated yesterday…
“[Americans] need lower intrusion from the federal government in their lives, they need lower taxes, so that they can take more of their paycheck home. And I know President Trump and those in the GOP conference are committed to making sure that that happens.”
This correction could shape up as a great buying opportunity.
Stay tuned!