Trump’s First Defeat!
At the end of this past week, Trump got a painful lesson in the limitations of legislative legwork and his own haughtiness. Trump’s new health law fell flat on its face this past Friday, after the Republican Party had to withdraw its new health care proposal for lack of adequate support. Trump, who penned the popular book, “The Art of the Deal,” is yet to bring his Midas touch from the world of business to that of Capitol Hill politics. It could be that the premature death of the health reform won’t be a dagger in the heart of the bull market, as per many peoples’ fears, but in order to keep the market on a continual uptick, investors will need to relax their expectations; the rally having left them panting for breath, now is the time to slow their heartbeats in keeping with any changes that may have to be made to the tax reform now in the works.
Concerns about the future of Trump’s health plan led stocks to record its strongest losing week since the November presidential elections. The failure to pass the law, though, is likely to push the Trump administration to push a tax reform initiative more attractive to investors’ pallets, one likely to provide some of the economic stimulus on which the rally over the last 4 months has been built.
The S&P 500 rose as much as 12% since the November 8th surprise election result, most of the gains coming on the background of expectations for lower taxes, slashed regulation and fiscal stimulus, all likely to prop up both economic growth and corporate earnings.
On Friday, stocks traded down after word reached the Street that the health reform plan had been sidelined. In tandem, the market succeeded in neutralizing most of the losses in the last trading hour, traders betting that the Republican-led Congress will redirect its focus and dedicate most of its energies now to pushing through tax reform.
In Trump’s election campaign he had promised to cut the corporate tax rate to 15%. In order to finance the tax reform, the Trump administration had relied on prospective savings from gutting Obamacare; that being the case, new sources of financing are now needed. It seems that if Trump wants to push through tax reform in one form or another before the August recess, it’s going to have to be very streamlined by nature. If the corporate tax rate is cut to somewhere between 25%-30%, that will be very far from the 15% rate peddled during the campaign, the Trump administration now talking about a 20% rate hike.
Despite the political pitfalls at hand, it seems that what could still boost up the market is the strong fundamental landscape. Firms’ Q1 2017 earnings are expected to show double-digit growth. It seems that global growth is also on the rise. A survey released on Friday showed that the German private sector grew at its fastest pace in 6 years this past March; in other words, we saw accelerated Q1 growth in Europe’s largest economy.
In the event corporate earnings growth doesn’t register double-digit growth, stocks are again likely to be seen as too expensive. With a 12-month forward PE of 18, investors are now paying more for S&P 500 stocks than they have at any point since 2004.
Weekly Summary: Stock indexes capped off the week sharply down. The Dow Jones fell 1.49%, the S&P 500 recording declines of 1.34%, the NASDAQ falling 0.8%.
|Tuesday||8:30||Adv. Wholesale Inventories||0.2%||Medium|
|Tuesday||9:00||S&P Case-Shiller Home Price Index||5.6%||Medium|
|Wednesday||10:00||Pending Home Sales||2.4%||Medium|
|Thursday||8:30||GDP – Third Estimate||2.0%||High|
|Friday||8:30||PCE Price Index||0.1%||Medium|
|Friday||10:00||Michigan Sentiment – Final||97.6||High|
|RHT||Red Hat, Inc.||AM||Monday|
|FDS||FactSet Research Systems Inc.||AM||Tuesday|
|DRI||Darden Restaurants, Inc.||AM||Tuesday|
|MKC||McCormick & Company, Incorporated||AM||Tuesday|
|VRNT||Verint Systems Inc.||PM||Tuesday|
|PLAY||Dave & Buster’s Entertainment, Inc.||PM||Tuesday|
|LULU||Lululemon Athletica Inc.||PM||Wednesday|
|WOR||Worthington Industries, Inc.||PM||Wednesday|
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|Sector||Healthcare | Biotechnology|