By: Dividend Sensei
Since the election of Donald Trump stocks have been on a tear, soaring to some of the highest valuations in history. That was due to the hope of numerous beneficial policy changes including: tax reform, deregulation, and massive infrastructure spending. And while true that a cutting of corporate taxes from 35% to 15%, a 10% repatriation tax holiday on foreign held cash, and up to $1 trillion in infrastructure spending would have sent corporate earnings soaring by as much as 20%, it’s beginning to look less and less likely that any of these policies will be enacted anytime soon.
That’s because House Speaker Paul Ryan convinced the president that he could get healthcare reform (the American Healthcare Act or AHCA) passed quickly and easily, which would have been seen as a great start to the President delivering on his campaign promises. However, not surprising to anyone that has tracked healthcare policy (or invested in healthcare companies), repealing and replacing the Affordable Care Act (Obamacare) is much easier said that done.
After all, while most people dislike the soaring premiums of the last few years, the ACA has accomlished some very important, and popular things such as: covering 24 million Americans via a large expansion of Medicaid, ensuring those with pre-existing conditions can get coverage, and young adults can remain on their parents’ plans up through age 26.
All of these things are being targeted by the House Freedom caucus, who are die hard deficit hawks and are demanding their removal in order to pass the bill in the House. The problem is that Senate Republicans, who are much more moderate, (and many are up for re-election in 2018), have said that such a bill would be DOA in the Senate.
On Thursday, the anniversary of the ACA’s passage, the House was scheduled to vote on the AHCA but because of a lack of support the bill was pulled. Reports state that President Trump gave House Republicans an ultimatum: pass the bill on Friday or the adminstration would shelve healthcare reform and focus on other promises, such as tax reform.
As we’ve seen, the ultimatum failed and now many on Wall Street are starting to wonder if the Administration can live up to its promise to get tax reform, (the main reason for the recent rally), done by the August recess. If they can’t then tax reform might not get done until the end of the year, or even the first half of 2018, and that’s assuming that such a complex policy change can be done during an election year.
Even if it can, chances are that the tax cuts won’t take effect until 2018 or even 2019, which would blow a big whole in the optimistic investment thesis that has been driving the Trump rally. And the longer healthcare reform drags on, mired in the quagmire that is DC politics, the more investors are speculating that the promised chances that Wall Street has been hoping for, might not just take longer than expected, but may prove smaller in magnitude as well.
Or to put it another way, the Trump Trade may be starting to unravel. After all, in the past month the S&P 500 is actually down 2.3% from its all time intra-day high of 2400. While that is still a ways off from a correction (10-19.9% decline from all time highs), it certainly lends credence to the idea that the market has hit its ceiling, at least in the short-term. We’ve already seen many of top performing sectors, including construction companies, industrial stocks, and banks, pull back sharply in recent weeks.
So what does this mean for us retail investors? Should we sell everything and wait for a sharper market pullback? The answer, of course, is a definite “NO!”. After all, numerous market studies have proven that market timing is a fool’s errand, capable of wiping out 99.6% of the market’s incredible wealth compounding power.
Rather, I urge you to embrace any future market corrections, no matter what it’s cause. In the meantime continue dollar cost averaging into a diversified portfolio of quality dividend growth stocks and remember that any company that can’t earn rising profits in numerous political/economic/interest rate environments, isn’t worth owning in the first place.