While some analysts concede that the rally may be somewhat driven by expectations for Trump’s business-friendly tax reform, DoubleLine’s deputy CIO Jeffrey Sherman sees things differently.
“From the standpoint of the president, he really can’t take credit for it except to continue status quo,” Sherman tells Yahoo Finance in the video above. “Markets like status quo. Markets don’t like change. And for that I’ll give the president credit that he really hasn’t changed much thus far at least when it comes to financial and fiscal policy.”
In other words, Sherman is saying that the market is celebrating Trump’s repeated failures to push through reform.
“Not one policy the president evoked into the marketplace has caused this,” Sherman said. “Now, he has caused a lot of rhetoric, or he’s contributed to the rhetoric. ‘We’re going to have tax reform. The plan’s coming out. The plan’s coming out. The plan is coming. We have the best plan. And it’s going to be a great plan. And it’s coming.’ But there’s been no follow-through.”
Lately, Trump has been pushing for corporate tax reform, which Sherman agrees would be “extremely beneficial” to stocks.
“Why is it beneficial?” he asked. “Well, we’re talking about forward discounting mechanisms. If I get tax reform tomorrow, I get it one month from now, or I get it really six months from now, that warrants a higher multiple today because those earnings will be growing significantly on an after-tax basis. That is, net incomes increase when you look at it after tax.”
Assuming tax reform is being discounted into the stock market, then this could be the setup for a selloff if there’s no deliverable.
Sherman added that the bond market, meanwhile, shows no signs of an expectation for tax reform.
“What’s strange enough is if you look at the bond market, [it] doesn’t believe in any type of tax reform, whether it’s on the corporate or personal side, when you look at where spreads and yields are in various parts of the market,” Sherman said. “I call it the inter-temporal balance, right. The bond market is contemporaneous looking at today where the stock market all these years of earnings that it’s trying to discount back. Again, the disconnect between the two markets does make sense when you stop and think about it.”
Listen to the full interview:
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.