This is the time of the year when most of us—especially the older folks among us—express amazement at how fast the year has gone.
Halloween is next Tuesday. Less than three weeks later is Thanksgiving. Shortly thereafter come Hanukah and Christmas celebrations. Before you know it: Happy New Year, 2018!
September is long gone. It is supposed to be the scariest month of the year for stock investors, perhaps in anticipation of Halloween.
During the Septembers from 1928-2017, the S&P 500 has managed to lose 1.0% on average (Fig. 1
). October has a history of some harrowing selloffs too, though on average it’s been up 0.5%. This year, the S&P 500 rose 1.9% during September, and October is up 2.2% through the end of last week. So now we can look past Halloween to November and December, which tend to be among the best months of the year on average, with gains of 0.7% and 1.4%, respectively.
In recent meetings with some of our accounts in NYC, I’ve been asked whether the stock market might take a dive if the Republicans fail to pass tax reform. This admittedly very small survey of investors’ psyches suggests to me that there’s still plenty of fear that the Republicans will screw it up despite their majority status in Congress. The fear is that the Republicans will deliver more tricks than treats.
Meantime, the stock market has continued to forge ahead to new highs ever since the Trump administration presented its 9/27 Unified Framework for Fixing Our Broken Tax Code
. The S&P 500 is up 3.1% since the day before it was released through the end of last week. On 10/4, Melissa and I noted that the framework is an outline that “is leaving it up to Congress to fill in the details that will make it a plan. The Republicans need to make tax reform the law of the land to hold onto their slim majorities in both houses of Congress come next year’s mid-term elections. They might fail as miserably on this challenge as they did on repealing and reforming Obamacare, when their majority splintered and not one Democrat in either the House or the Senate supported their effort.”
As we noted yesterday: “Also driving the market higher recently are rising expectations that there will be tax reform by early next year that will include a cut in the corporate tax rate. On Thursday, the Senate passed a budget resolution that may expedite tax legislation. The budget proposal includes $1.5 trillion in tax reductions over the next 10 years. It might be possible to pass it with a simple 51-vote majority in the Senate, without a conference committee with the House of Representatives.”
So the question now may be: “What if tax reform happens?” rather than “What if it doesn’t happen?”!
The Republicans might actually deliver a treat rather than another lame trick. There’s increasing chatter that this might happen by the end of this year or early next year. That provides an upbeat path for the stock market bulls to continue charging ahead. If it turns into a stampede, then the resulting meltup could set the stage for a correction when tax reform is actually enacted. Of course, the selloff would be more severe if the Republicans screw it all up. Let’s review the recent chatter, as provided by a 10/13 CNBC article
on the subject:
(1) President Donald Trump, top White House officials, and House Speaker Paul Ryan all aim to approve a tax bill before the end of this year. Ryan said on Thursday, October 12 that he would keep the House in session through Christmas if necessary.
(2) Texas Republican Senator Ted Cruz told CNBC on Friday, October 13 that it will take “at least a couple months” to iron out differences within the GOP, which has a narrow majority in the Senate. “I do think virtually every Republican wants to get to yes” on overhauling the tax system he said. He expects tax reform to get done “late this year or early next year.”
(3) The GOP is running into political dissent within the party. Some GOP lawmakers, such as Senator Bob Corker, have expressed concerns about the potential budget deficits the tax cuts would generate. Republican lawmakers in high-tax blue states have started to push back on a proposal to get rid of state and local tax deductions.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.