I will leave the post mortem with others on what went down with changing the ACA. Let’s instead focus on the real world economic and market impact. With the law now remaining in place for the foreseeable future, individuals will continue to suffer from double digit insurance premium increases and very high deductibles. On the business side it is the smaller ones where the current law is most impactful. Not too long after the events of Friday, the National Federation of Independent Business issued the following statement: “The House’s failure today to pass the American Health Care Act is extremely disappointing. Small businesses have struggled for seven years under Obamacare’s taxes and mandates, and now that struggle will continue for the foreseeable future. Passing a bill with a massive tax reduction for small businesses should have been the easiest of votes for both parties.” It was in the March NFIB small business optimism index two weeks ago where the CEO of the NFIB said this: “If the health care and tax policy discussions continue without action, optimism will fade.” Put an X over the former and now we move on to the latter.
Can we all assume that altering the US tax code along the lines of the hopes and wishes created on November 8th just got that much more challenging. Paul Ryan on Friday said “Yes, this does make tax reform more difficult but doesn’t make it impossible.” I have no doubt that taxes will be cut to some extent but we all know that it’s the tax increases needed to pay for them (no more hoped for savings from overhauling the ACA) that remains very controversial and now politically we’ve seen there are no slam dunks for DJT.
As for markets, I’m of the opinion that the rally since November 8th in US stocks is solely due to the hopes that economic growth and earnings will accelerate in response to tax and regulatory relief. I don’t believe we rallied because the Fed may hike rates 3 times this year instead of the once per year pace. I don’t believe we’ve rallied because Q1 GDP will likely have a 1 handle on it. I don’t believe we rallied because earnings expectations have actually fallen. I don’t believe we rallied because the ECB is cutting QE by 25% next week, the BoJ may be in a subtle taper and the BoE has an inflation problem on their hands. Did we rally in conjunction with foreign markets with us all tied together? Maybe but the biggest winners, that being emerging markets which I’ve been bullish on for the past year, I believe had their own dynamics and had their own vicious 5 year bear market since 2011 that clearly has ended.
I’m still hopeful that we will get tax cuts that will lead to faster economic activity and earnings growth but has the stock market priced in the perfect scenario already that is becoming clear that we just won’t get? Since December 31st 2013, the S&P 500 is up 27% not including dividends. Non GAAP earnings per share have gone from $107.30 in 2013 to $106.25 for 2016. GAAP earnings have gone from $100.20 to $94.54. If we look at the 12 months ended March 31st for what is estimated to be a new trailing 12 months of earnings, Non GAAP eps will have gone up just 4% from 2013 to Q1 2017 IN TOTAL. GAAP earnings are estimated to have fallen by .5% (to $99.69 per share and thus and S&P multiple of 23.5x earnings) during the same time frame. Again, compare this with the 27% gain since 2013 that followed a 30% rally in 2013. Can you say multiple expansion.
Bottom line, I am really disappointed that the ACA is not going to change for the better (for now) and am really pissed off that tax reform now may get all chopped up with potentially only modest changes. That said, I believe it is GUT CHECK time for everyone that is a fiduciary of other people’s money which I am one of. A watered down Trump agenda with no changes of substance to healthcare and a more modest tax reform bill is NOT what I believe is currently priced in to stocks.
As for the Democrats in Congress, and I’m sure Obama too, that seem to be cheering Friday’s legislative bust in the face of a system that they unilaterally overhauled and is now clearly on fire, I can only think of this song and these lyrics from Icona Pop titled “I love it” that they seem to be singing:
“I crashed my car into the bridge. I watched, I let it burn. I threw your shit into a bag and pushed it down the stairs. I crashed my car into the bridge. I don’t care, I love it. I don’t care…You’re on a different road, I’m in the milky way. You want me down on earth, but I am up in space. You’re so damn hard to please, we gotta kill this switch…”