November 2017 - Politics & the Markets (Greg Valliere - Horizon Investments)

The ongoing thoughts from Greg Valliere, the Chief Global Strategist for Horizon Investments, who has a lot of great insights to politics & the ramification on financial markets.

November 2, 2017

Six Key Takeaways as Tax Bill Comes Into Focus

WE'RE NOT SURE what will be in the final House Ways and Means tax bill – hell, members of the committee still aren't sure. But amid all the math problems and last-minute bargaining this week, several general themes have come into focus:

1. A Delay of a Day or Two Isn't a Big Deal: Hand-wringing over a one-day delay (or a two-day delay) seems unwarranted. A bill will emerge today or tomorrow, and then it will be on a very fast track for a couple of weeks.

2. Tax Cuts for the Wealthy are Radioactive: Republicans can read the polls, which show deep public antipathy for tax cuts for the wealthy (and for business, for that matter). The business tax cuts are coming, but a top individual rate of 39.6% will prevail; the key issue is at what income threshold it will kick in. And while there may be some liberalization of the estate tax, its abolition is looking less likely.

3. Phase-ins and Sunsets – the New Reality: There are conflicting reports this morning about whether the corporate cuts will "sunset" in several years, or whether some provisions will be phased in. The tax writers need to make the numbers add up, which means some gimmickry is likely – which will create more complexity and more uncertainty about the out-years.

4. Whatever Happened to Regular Order? This refers to a deliberative process – hearings, markup, amendments, official scoring, etc. But the Ways and Means Committee may pass its bill IN ONE DAY next week, setting in motion a steamroller that will annoy "good government" types who want this process to slow down. It will, once it hits the Senate.

5. President Trump Will Keep Butting In: Did the president really suggest yesterday that abolition of Obamacare should be in the tax bill? Inserting an issue that radioactive could add weeks to the process in the Senate. This trial balloon was shot down even at the White House, but make no mistake – Trump, even from Asia, will micromanage.

6. The December Train Wreck: We're surprised more people aren't talking about the very real threat that Democrats could blow up the budget process in early December. The current temporary funding deal for fiscal 2018 expires on Dec. 8, when the GOP will need votes from Democrats to keep the government open. But Democrats are adamant – if there's no resolution of the Dreamers issue specifically and immigration more generally, they will withhold their votes for a budget. This could become a huge distraction for the tax bill.

BOTTOM LINE: We're sticking with our odds of a 55% chance that the tax bill will pass, but but some major potholes loom. We continue to believe the final bill will not be as grand as Trump envisions, especially if phase-ins prevail. But the headline for the markets hasn’t changed: the likelihood huge corporate tax cuts and the resulting impact on earnings.

November 1, 2017

Tax Bill Is Off to a Rocky Start; Lucky Janet Yellen, About to Get Fired

IT'S BEEN A DIFFICULT WEEK, and it's only Wednesday. Terrorism in New York, the Mueller indictments, and now there are signs that the House Ways and Means Committee is having trouble producing a tax bill. And, oh yes, Janet Yellen apparently will get fired tomorrow.

NOT WHAT TRUMP WAS PLANNING: An ISIS-inspired attack in America's biggest city will require more than just rhetoric from the president – a huge distraction just as it becomes clear that Robert Mueller is methodically assembling a case that will go much higher up the chain of command. These two developments will dampen the campaign-style rollout of a tax bill which – incredibly – still isn't ready after months of secret deliberations.

FROM WHAT WE CAN TELL, the tax writers haven't agreed on a lot: state and local taxes, 401(k) contributions, the estate tax, a new top individual rate, whether to phase in corporate tax cuts, the size of the child care credit, how to set rules for pass-through corporations. You've got to be kidding – Nov. 1 supposedly was the roll-out date, and all of these issues are still unresolved ??

TWO MAJOR CONCLUSIONS: First, the bill will require significant horse-trading next week and beyond, as the House struggles to pass a bill by Thanksgiving; this will be a work in progress and make no mistake – everything is negotiable. Second, the final product may NOT be a simpler code, which was a major objective. On issue after issue, such as the state and local tax, there will be complicated split-the-difference deals that will keep the tax accountants very busy.

THE TIMETABLE: Conspicuously absent from this debate is the Senate, where a tax bill may not emerge until late this month. Finance Committee Chairman Orrin Hatch undoubtedly will wait to see what emerges in the next few weeks in the House; he may produce a bill after the Thanksgiving break. It is extremely doubtful that a House-Senate agreement will come in 2017; enactment of a bill is still likely – later in the winter.

THE BIG HEAD-SCRATCHER: As Trump boasted yesterday, the economy and the stock market are both surging – so we continue to wonder: is a huge tax cut really necessary? Tax reform is a different issue; tax reform on a wide range of provisions strikes us as a very good idea, long overdue. But is a tax cut that will lose $1.5 trillion really needed for a growing economy with a 4.2% unemployment rate?

THIS WILL BE AN OBVIOUS ISSUE FOR THE NEW FEDERAL RESERVE CHAIRMAN, who apparently will not be Janet Yellen. Dismissing Yellen – probably tomorrow – mystifies us; she has done a superb job. Apparently Yellen is not sufficiently opposed to regulations while Jerome Powell is. 

YELLEN SHOULD BE GRATEFUL: She'll go out on top, widely praised for engineering an economic recovery and presiding over a historic stock market rally. She won't have to grapple with reducing the Fed's balance sheet, and she won't have to repeatedly hike rates – as Powell will – in response to full employment, a huge tax cut and soaring deficits. Lucky Janet Yellen, getting out just in time.

DISCLAIMER: Horizon Investments, LLC is an SEC-registered investment adviser. The views expressed are those of the author, Greg Valliere, and do not necessarily reflect the views of Horizon Investments. They are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. Horizon Investments is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. For more information about Horizon Investments, contact us by calling 866.371.2399 or visit our website at