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Healthcare fiasco, tax reform, markets


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Healthcare fiasco, tax reform, markets

David Kotok is the chairman and chief investment officer of Cumberland Advisors. The views and opinions expressed in this piece represent only those of the author and not necessarily those of S&P Global Market Intelligence.

Pundits have hypothesized that the failure of Obamacare repeal and replacement has so undermined Trump that the tax reform, infrastructure and repatriation package is likewise doomed. We disagree.

In the past few weeks we have encountered audiences in various cities and venues. The largest audience for a speech numbered over a thousand, while the smallest was 14. The composition of the groups included the investor class, bankers, independent businesspeople, charitable organization senior staff or trustees, and others. So our conclusion is based on a collection of thousands of anecdotes. We often asked audiences for their views by a show of hands.

The results — and this was before the Trump-Ryan vote debacle — were heavily one-sided. Few wanted the Trump administrative machine to tackle healthcare first. Nearly all wanted to get tax reform done. Nearly all were deferring decisions and waiting to see what the new rules would be so they could proceed with their personal and professional plans. That was a universal view.

My takeaway is simple. There is pent-up business and investment demand. Market agents are waiting anxiously to unleash powerful positive economic forces. They want to see the tax cut enacted. They want to be able to pencil a number on the infrastructure plan. They want to know the border-tariff barriers, and they will then price them out and alter their behavior. They want to see low-tax repatriation, and then $1 trillion will flow from passive holdings into active use.

We think the Trump-Ryan healthcare fiasco will be followed by the Brady-Mnuchin tax plan success. And we think it will come quickly.

The support for tax cuts is broader and deeper and more unified than the political coalition behind the failed healthcare reform. So healthcare waits. But tax reform advances.

When it does, business activity will accelerate and markets will go higher. Maybe much higher. Price out the full application of the Brady memo, and we can estimate a permanent addition of $14 a year to S&P 500 index earnings. Then grow those earnings at nominal GDP growth, plus an adjustment for balance-sheet changes on interest deductions, and add a repatriation effect. We get a present discounted value with a 25 to 30 multiple on the tax changes. That is about 400 points in the index.

Conclusion: The healthcare political mess allows tax reform to rise to the top. The tax reform package has the votes to pass. It will come quickly. We have lowered our cash reserve and raised our investment posture in our U.S. exchange-traded fund managed accounts. We think the market will go higher and, with a tax reform bill, maybe a lot higher.

We know, however, that our pro-tax-reform position is controversial. And we may be wrong. There is a respected argument on the other side. Let me offer this link to Stan Collender's recent column in Forbes, "Passing Tax Reform Will Be As Difficult As Repealing Obamacare."

You may also want to refer to the following story in The Wall Street Journal, "Republicans' Tax Overhaul Likely to Face Its Own Slings and Arrows."

I am giving you the arguments on both sides but taking the position that tax reform will pass because it has much broader support than Obamacare repeal and replacement.