Stocks are rising today on reports that the Trump administration will launch a major tax-reform push next week. Speeches made at Jackson Hole today don’t appear to have upended the market.
The SP 500 has gained 0.5% to 2,451.98 at 19:23 a.m. today, while the Dow Jones Industrial Average has risen 110.66 points, or 0.5%, to 21,894.06. The Nasdaq Composite has advanced 0.4% to 6,296.05.
Evercore ISI’s Dennis Debusschere explains why Janet Yellen’s speech has been a non-issue:
Waiting for comments from Krishna, but the Yellen speech doesn’t seem to indicate that financial stability concerns will change the policy path if inflation remains weak. That is likely why the market increased on the release. It is all about inflation and as we highlighted in the Early Thought today, inflation headwinds continue to mount with Tech’s pressure on pricing (Amazon.com (AMZN) and the Whole Foods (WFM) price cut news) and shelter-costs headwinds to CPI are unlikely to ease. That will reinforce the low inflation/real rate/economic volatility regime that drove risk assets higher so far in 2017. The risks to that backdrop are – persistent political uncertainty, a significant deceleration in inflation and recession fears. For now, improving economic activity is helping to stabilize inflation expectations and real economic growth is improving, which is a tailwind for risk assets as well.
Goldman Sachs strategist David Kostin and team note that mutual funds are still positioned for ” some deregulation and tax reform.” They explain:
The average large-cap mutual fund is overweight our basket of stocks with the highest tax rates, which we use as a proxy for tax reform expectations. In previous research, we showed that the policy (deregulation) premium is the total return of the Banks industry in excess of the SP 500 and interest rates. Based on this assumption, funds are still positioned for some deregulation given their net positive weight in Banks in excess of their benchmarks and firms levered to changes in the 10-year US Treasury yield. Funds are most overweight our list of stocks with secular growth characteristics, which generally outperform in growth-scarce environments. This suggests that funds continue to expect the US economy to grow at a modest pace.
Deutsche Bank’s Jim Reid is taking a wait-and-see approach to tax reform:
Elsewhere, there were more mixed signals as to the momentum on Trump’s tax reform plans. Earlier this week, Bloomberg reported there was more agreements between both sides on how to fund the tax cuts, while reports overnight now suggest Republican leaders don’t expect to release a joint tax plan with the White house next month, and instead will rely on House and Senate committees to solve residual unanswered questions. We continue to wait and see.
Wait and see it will be.