Markets turn focus towards Trump address to Congress

On the evening of Tuesday, February 28th, US President Trump is slated to give a major address to a joint session of Congress in lieu of the usual State of the Union address, as Former President Obama also did when he was newly-inaugurated. This first official congressional address by Trump will potentially be pivotal for financial markets, especially since he has promised a major impending announcement regarding what he has claimed to be a “phenomenal” tax reform plan.

Equity markets have been on a virtually unrelenting surge in the past few weeks and months as eager anticipation has continued to build around Trump’s promises of lower corporate taxes, decreased regulations, and increased fiscal spending. Tax reform, in particular, has been one of the key drivers of this stock rally, as bullish investors have become further emboldened by the prospect of accelerated company earnings improvements through potentially dramatic corporate tax cuts.

The month of February has seen an atypical combination of market moves that has included sharp surges for both equity markets and safe-haven gold prices, while the US dollar has also remained generally buoyant at the same time. This suggests that while strong economic optimism has continued to pervade investor sentiment, there are still many uncertainties on the immediate horizon that have prompted heightened caution, especially since equity prices have been hitting new record highs almost on a daily basis.

Among the most notable of these uncertainties are political conditions in Europe, with the UK preparing to trigger Article 50 in March to separate from the European Union (Brexit), and upcoming French elections threatening to put in office a far-right, anti-EU populist in Marine Le Pen. On the very immediate horizon, however, the primary source of uncertainty continues to be the new Trump Administration and its execution of economic policy promises.

Again, chief among these promises in the eyes of the financial markets is currently that of tax reform. Trump had originally promised on the campaign trail last year to cut corporate taxes down to 15%, and has recently talked about unveiling a “phenomenal” tax plan within weeks, purportedly during or around his address to Congress next Tuesday. House Speaker Paul Ryan has his own 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 may have substantial difficulty in garnering the necessary support to pass through Congress.

Meanwhile, the new Treasury Secretary, Steven Mnuchin, said earlier in the 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 likely unrealistic given differing opinions even among Republicans regarding the path to tax reform and how to pay for it, including through the controversial border tax adjustment.

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). Given the political and economic difficulties that are being encountered in resolving this critical health care issue, it could be some time before the attention of both the Administration and Congress is turned to tax reform.

So where does all of this leave the markets? So far, equity investors have exhibited much patience in their optimism for Trump’s proposed plans. For several weeks now, most intraday sell-offs in stocks have been eagerly bought-up, pushing the major indexes to progressively higher highs. How long could this patient optimism last? The closest major test of it should indeed come on or around Tuesday night, as Trump either delivers on his tax plan announcement and other fiscal stimulus topics, or fails to do so. A failure to follow-through in a timely manner would likely try the patience of the over-extended equity markets, which may potentially lead to a sharp pullback for stocks, further gains for gold, and pressure on the US dollar.

Open an account in minutes

Experience award-winning platforms with fast and secure execution.

Web Trader platform

Our sophisticated web-based platform is packed with features.

Economic Calendar