Why the Stock Market Shouldn’t Take Trump’s Bait on ‘Tax Cuts 2.0’
Trump's first tax reform package helped launch the stock market to new highs. Investors should be more skeptical this time around. | Source: Source: REUTERS / Kevin Lamarque
- Donald Trump and his advisors have begun to tease the stock market with hints about a second round of tax cuts.
- They clearly want investors to price in another tax reform package ahead of the 2020 U.S. elections.
- History says that the stock market shouldn’t take the bait.
Every U.S. president has received undue credit – or blame – for how the stock market fared under his watch. But Donald Trump and his advisors have taken it upon themselves to inflate the appetites of Wall Street bulls with a steady stream of market-friendly talking points.
From promises of business-friendly tax cuts to constant assurances that crucial trade deals are just a few minor edits away, the White House has supplied the stock market with ample rocket fuel to launch the Dow and other indices to all-time highs.
As dubious as some of those breadcrumbs have been – the White House said a comprehensive U.S.-China trade agreement was 90% complete in June 2019, seven months before Trump signed a partial trade deal – investors have seized on them time and time again.
So it makes sense that the Trump administration plans to double down on this strategy in 2020.
There’s just one problem. Trump is running out of talking points, and recycling through the usual suspects may backfire this time around.
Take tax cuts.
White House Pumps Stock Market by Teasing ‘Tax Cuts 2.0’
Trump and a Republican Congress gifted investors a corporate-friendly tax reform package in December 2017. The Tax Cuts and Jobs Act of 2017 provided temporary relief to some individual taxpayers, but the biggest changes came from permanent cuts to corporate tax rates.
Tax reform triggered a surge in stock buybacks that ratcheted up equity valuations, but it failed to spur the U.S. economy to the administration’s 3% growth target.
Thirteen months later, Trump and his advisors are back for round two.
Speaking at Davos, Treasury Secretary Steven Mnuchin said Trump had instructed his advisors to begin working on “tax 2.0,” which he claims will “stimulate economic growth” – not that he thinks the administration’s economic program isn’t working.
“The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts,” Mnuchin told CNBC during an interview at the World Economic Forum. “They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.”
This week, Trump set a 90-day deadline for unveiling a “very big” middle-class tax cut . But there’s absolutely no way that the Democratic majority in the House of Representatives passes anything resembling tax cuts.
Even Trump conceded that :
“We’re talking a fairly substantial … middle-class tax cut that’ll be subject to taking back the House and obviously keeping the Senate and keeping the White House,” he told The Wall Street Journal.
So at best, Trump wins a second term, the Republicans retake the House and retain the Senate, and tax reform gets rolling when the new 117th U.S. Congress convenes on Jan. 3, 2021. That means the cuts likely won’t take effect until 2022, at the earliest.
But, again, there’s just one problem. There’s no guarantee that the Republicans will retake the House if Trump wins reelection.
And history says they won’t.
History Says Trump Will Win Reelection – And Republicans Will Lose the House
It’s true that incumbent presidents have a spectacular winning percentage . But dating back more than 50 years, no incumbent president has won reelection and seen his party take control of either chamber of Congress from the opposition.
Not Barack Obama, who trounced Mitt Romney in 2012 but couldn’t inspire a changing of the guard in the House of Representatives.
Not Bill Clinton, who crushed Bob Dole even harder in 1996 but couldn’t wrest either the House or the Senate from the Republicans.
Not even Ronald Reagan – who won a staggering 49 states and 525 electoral votes in 1984 – gave Republicans enough down-ballot support to flip the Democrat-controlled House.
Only George W. Bush entered his second term with the executive and legislative branches unified under single-party control, but Republicans already had majorities in both chambers of Congress heading into 2004.
The Stock Market Shouldn’t Take Trump’s Bait
History suggests that Trump will win reelection, but it also suggests the Republicans face an uphill battle to retake the House – a battle they’ll likely lose.
For the U.S., that means at least two more years of partisan gridlock peppered with the increasing use of executive orders as de facto substitutes for legislation. For investors, it means that tax cuts and other sweeping economic reforms are likely just pipe dreams.
That won’t stop Trump from teasing tax cuts until the last vote is cast in November. But the stock market shouldn’t take the bait.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
