Markets in flux ahead of pivotal Trump speech

Markets were in a state of flux on Tuesday as investors eagerly awaited President Trump’s evening address to a joint session of Congress. After the Dow hit its 12th consecutive all-time high on Monday, matching its longest record-breaking streak ever, US stocks fell back modestly as of early Tuesday afternoon. Meanwhile, the US dollar continued to be pressured while gold remained supported in the face of growing risk concerns over both US policy under the Trump Administration and potentially volatile geo-political conditions.

Trump’s speech on Tuesday night will be especially pivotal for financial markets, as investors are considering his congressional address as a test of his ability to follow-through on his promised agenda. Therefore, the effect of the speech on the markets will most likely lie in the details divulged, or potential lack thereof. More vague assurances will unlikely continue propelling the markets ever higher. However, any concrete details supporting Trump’s ambitious campaign promises, especially with respect to corporate tax reform, fiscal spending, and deregulation, could inject yet another shot of adrenaline into the markets.

Two or three weeks ago, Trump promised a major impending announcement regarding what he claimed to be a “phenomenal” tax reform plan within two or three weeks from then. The markets have taken that to mean that we will be hearing about this tax phenomenon during tonight’s congressional address. The bar of expectations, therefore, has been placed very high. Even if we do get a glimpse into this proposed plan on Tuesday evening, however, the challenges in getting such a plan approved and passed through Congress will indeed be formidable. 

Trump had originally promised on the campaign trail last year to cut corporate taxes down to 15%. House Speaker Paul Ryan subsequently developed his own Republican-backed plan to cut the corporate rate down to 20%, but it would be contingent upon a border tax adjustment that is highly controversial among many US companies and their legislative representatives, and therefore may have substantial difficulty in garnering the necessary support to pass through Congress.

Meanwhile, the new Treasury Secretary, Steven Mnuchin, said last week that he was looking to get a comprehensive tax reform plan passed by August. While this is an ambitious objective that has given some further confidence to the markets, it is probably unrealistic given differing opinions even among Republicans regarding the path to corporate tax reform and how to pay for it while keeping the deficit hawks at bay.

Aside from these severe potential challenges in getting a tax reform plan agreed upon, Trump has also recently stated that the implementation of a new tax plan would need to come after the repeal and replacement of the Affordable Care Act (Obamacare). With the many political and economic difficulties that are currently being encountered in resolving this critical health care issue, it could be quite some time before the attention of both the Administration and Congress is turned to tax reform.

Given these and many other obstacles potentially challenging Trump’s ability to execute his fiscal policy objectives, equity markets going forward may have a hard time replicating February’s sharp, virtually parabolic climb, even if Trump reveals details of his tax plan tonight. These challenges may be further exacerbated by a Federal Reserve that has become increasingly hawkish. Several Fed officials, including Chair Janet Yellen, will be speaking on Friday. Futures markets have now begun to realize that a March rate hike may be more likely than previously thought. Probabilities of such a hike have risen sharply from the high-teens and low-20’s up to 35% as of this writing.

While equities could very well surge further during the balance of the week in reaction to a potentially detailed and ambitious Trump speech, the downside continues to beckon if and when the market’s very high expectations meet any significant degree of disappointment.

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