After a busy week that saw stocks finish lower after enduring their worst day of the year on Wednesday, the week ahead will see a modest economic data and earnings flow.
On the economic data side, we’ll get the minutes from the latest Federal Reserve meeting and the second estimate of first quarter GDP.
Last week, we saw a change in character from the markets as negative headlines related to President Donald Trump sent stocks lower for the first time, really, since election night. On Wednesday, markets were digesting a one-two punch of headlines about Trump’s dealings with ousted FBI director James Comey, and on Friday, The New York Times reported Trump called Comey a “nut job,” in a memo.
On Friday, The Washington Post also reported that someone close to the president is a person of interest in the investigation into ties between Russia and the Trump campaign.
All of this, of course, is only tangentially related to markets. But what’s important for investors to keep in mind is that it doesn’t matter whether you agree with this reporting on the president, believe there is nothing to these reports, or think we’re witnessing the beginning of a damaging presidential scandal.
What matters is that markets are paying attention. And moving.
Monday: Chicago Fed national activity index, April (0.18 expected; 0.08 previously)
Tuesday: Markit US flash manufacturing PMI, May (53.1 expected; 52.8 previously); Markit US flash services PMI, May (53.1 expected; 53.1 previously); New home sales, April (-1.8% expected; 5.8% previously); Richmond Fed manufacturing index, May (15 expected; 20 previously)
Wednesday: FHFA home price index, March (+0.5% expected; +0.8% previously); Existing home sales, April (-1.1% expected; +4.4% previously); FOMC minutes
Thursday: Wholesale inventories, April (+0.2% expected; +0.2% previously); Initial jobless claims (238,000 expected; 232,000 previously)
Friday: First quarter GDP, second estimate (+0.9% expected; +0.7% previously); First quarter personal consumption, second estimate (+0.4% expected; +0.3% previously); Durable goods orders, April (-1.5% expected; +0.9% previously); University of Michigan consumer sentiment, May (97.5 expected; 97.7 previously)
We’re still talking about taxes
When Donald Trump was elected president and markets rallied, the two words you heard most often from those in markets were “tax reform.”
Cutting taxes would be good for corporate earnings, good for consumer and corporate confidence, and cutting taxes was viewed as a straightforward, readily accomplishable goal for the newly-elected president.
But now that we are nearing the end of May, and with just a scant two months to go before the self-imposed July 28 tax reform proposal deadline set out by Treasury Secretary Steven Mnuchin back in February, it is clear tax reform has been pushed down the legislative agenda.
In an email on Friday, economists at Goldman Sachs said they had begun to reevaluate their stance on how much of an impact any fiscal changes — i.e. infrastructure packages or other stimulative programs — from the Trump administration might have on the economy in 2017 and beyond.
“The political outlook has changed considerably over the last couple of weeks,” the firm writes.
“Two weeks ago, the House looked unlikely to pass its health legislation and the investigations involving the White House were largely background noise. Now, ongoing consideration of health legislation looks likely to postpone consideration of tax cuts for several months and the investigation into the Trump campaign’s conduct (and related matters) has clearly escalated.
“In light of the scant progress made on tax reform to date, the probability of a meaningful fiscal boost ahead of the 2018 midterm election had already appeared to be declining before the latest events, and has declined slightly further since.”
Now, Goldman still sees both the economic and political cases for tax reform as solid. And as we heard from hedge fund manager Bill Ackman at the SALT conference this week in Las Vegas, the prevailing business-class view of tax reform is that it is an obvious and straightforward initiative for the president and Congress to pursue. Goldman also notes that House Republicans aren’t likely to want to go home to campaign in 2018 with no major legislative accomplishments to show for it.
But while the White House spends time dealing with the noise of negative stories about Trump’s relationship with the FBI and Russia, there still remains the issue of what, exactly, does tax reform that would get broad Republican support look like.
“It is…not clear how much support there will be for a simple tax cut,” Goldman writes.
“The White House has proposed a tax cut that we expect might cost $3-4 trillion over ten years but House Republican leaders have insisted on revenue-neutral tax reform that does not add to the deficit and earlier this week, Senate Majority Leader Mitch McConnell called for revenue-neutral tax reform as well.
“While their definition of ‘revenue-neutral’ includes dynamic scoring and other technicalities that might be worth several hundred billion dollars over ten years, even under a loose definition of ‘revenue neutral’ this would seem to preclude a substantial net tax cut.”
And as these charts from Goldman show, it isn’t just that markets have discounted the chances of major reforms getting through, it’s that they’ve ruled them out altogether. “This suggests that while the probability of a meaningful tax cut by 2018 has diminished, there is limited risk of policy disappointment given such low expectations,” the firm writes.
So while equity markets have grown interested in headlines coming from D.C., the stock market is reflecting a fairly superficial read on how the investor class really feels about politics. Which is to say that investor interest in the Trump administration changing the trajectory of the U.S. economy came and went, and the markets grew tired of waiting for a signal to emerge from the noise.
Now it’s just a good show.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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