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While many political pundits are heavily discounting, if not completely writing off, President Trump’s chances for enacting sweeping tax reform and deregulation, most investors in U.S. stocks seem to believe that he’ll deliver on these promises, the Wall Street Journal reports. For example, Cornerstone Macro LLC, a firm providing economic, policy and strategy research to financial institutions, conducted a survey of 1,100 clients last month and found that more than half expect Congress to pass a significant tax bill before the 2018 midterm elections, per the Journal. For the year-to-date through Tuesday, the S&P 500 Index (SPX) is up 9.9%. If confidence in the passage of the Trump agenda is flagging, more recent readings don’t reflect it. Also through Tuesday, the S&P 500 is up 1.5% for July alone, and continues to set new all-time highs, per Yahoo! Finance data.
Lone Trump Optimists
Stock investors’ optimism makes them the last bulls on Trump, a sharp contrast to investors who have abandoned Trump trades in bonds and the dollar.
The consensus among Wall Street analysts seems to be that some sort of tax bill eventually will emerge from Capitol Hill, but that it will entail simple tax cuts, rather than comprehensive tax reform, according to CNBC. The failure of Senate Republicans to agree on a health care bill is taken by many as an indicator that the rest of the Trump agenda is likely to stall in Congress, CNBC adds. On the other hand, House members will be desperate to show some achievements when they face voters next year, and that increases the odds of at least some sort of tax bill gaining passage, per analysts cited by CNBC.
Expert opinion is divided on whether any tax cuts will be solely for individuals, or whether significant corporate tax reductions also will be in the mix. Tom Block, a Washington policy analyst with research firm Fundstrat Global Advisors LLC, told CNBC that “there’s near unanimity that the corporate tax rate is too high.” He expects that a one-time tax repatriation holiday also is likely to pass, if the corporate tax rate is lowered, and that a reduced rate for small businesses also might be part of the package.
Cautious Bond, Dollar Investors
The foreign exchange markets appear to registering a vote of no confidence in the Trump program of fiscal stimulus and economic expansion, the Journal says. The spot value of the U.S. Dollar Index (DXY), which compares the dollar to a basket of other currencies, shot up after the election but now is below its pre-election figure, per data from Bloomberg Markets. Likewise, despite two rate hikes by the Federal Reserve this year, bond yields have moderated, the Journal observes, indicating that bond investors are not anticipating the economic jump start that Trump has promised.
Strategas Research Partners, meanwhile, has found that the shares of corporations with high tax rates initially outperformed low tax rate stocks in the period of post-election investor euphoria, but that advantage has evaporated this year, the Journal says. So, while investors in general still may harbor hopes of significant corporate tax cuts, investors in the companies that theoretically have the most to gain appear to be less confident.
Falling Building Stocks
Shares of construction materials companies, which would be big beneficiaries of Trump’s infrastructure initiative, are now down by 1.11% for the year-to-date through Tuesday, per data from Fidelity Investments. Construction and engineering companies are even bigger losers, down by 9.76%, also per Fidelity. This industry excludes homebuilders. It does include civil engineering companies and large-scale contractors involved in nonresidential building projects, exactly the sort of companies expected to benefit from a federal push to rebuild the country’s infrastructure, a push that seems less likely with each passing day.