Market Analysis - Kira Brecht
Stocks Poised To Stumble If Trump's Health Bill Flops
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
(Kitco News) -March 23 – As Republican lawmakers scurry to cobble together enough votes to pass the House Health Care bill on Thursday, some chinks in the armor are beginning to appear. The stock market has rallied soundly in recent months amid expectations for significant tax reform and infrastructure legislation.
The ability or failure of the Republican controlled Congress to pass the health care bill will be viewed as a litmus test on their ability to move forward on other key economic legislation.
If financial markets become concerned that economic-growth producing proposals such as tax reform and infrastructure spending may have difficulty moving along the legislative track, the stock market will need to reprice, which means lower prices ahead.
"The health care bill is really the first 'put up or shut up' moment of Trump’s presidency," says Brad McMillan, Chief Investment Officer for Commonwealth Financial Network. "Up to now, we have had a rally based on the expectation that Trump and the Republicans were going to enact meaningful change. Hope has been the dominant emotion since the election, and all of the political noise has been viewed in that context."
With this health care bill, financial markets will find out whether meaningful change can really happen – or not, McMillan says. "Recent market weakness may reflect that ebbing of hope, because if health care reform can’t be done, tax reform looks much less likely as well. This bill really is a reality check on whether the Republicans can deliver on their policy promises. If not, the premise of a new, low regulation and low tax era may be reconsidered," McMillan adds.
Lower Rates For Longer?
Chris Zaccarelli, chief investment officer for Cornerstone Financial Partners weighs in: "To the extent that those pro-growth, and most likely inflationary, policies that are expected out of the Trump administration are delayed, coupled with the recently dovish forecasts of the Federal Reserve, there is a belief among many investors that longer term interest rates will stay lower for a longer period of time."
That's bullish for gold.
Don't Forget About the Debt Ceiling
Current developments may just be a preview to more significant deficit, budget and debt ceiling debates ahead. "We are just warming up for the main event in August, when the debt ceiling war will be waged," says Jamie Cox, Managing Partner for Harris Financial Group. "If Republicans can't come together on something as universally hated as Obamacare, then we may have some market volatility during that time. What we don't need is a repeat of 2011, when the debt ceiling ridiculousness led to the loss of the US AAA credit rating. Fighting about the features of healthcare is one thing, but messing around with our debt structure could easily set the economic recovery back several years and is far more consequential than adding a letter to the ACA."
It was the dramatic debt ceiling standoff in 2011 that helped propel gold prices to their all-time high above $1,900 per ounce. In August 2011 that Standard & Poor's rocked the world markets with a downgrade of the U.S. credit rating.
Gold stands to benefit from rising levels of stock market volatility ahead. If Republicans fail on this first most important legislative test, stock investors may begin to question the currently stretched valuations levels.
The stock market is ripe for a significant correction at any time and gold will be a beneficiary of falling stock prices. Furthermore, just because the Republicans control Congress doesn't mean the budget, deficit and debt ceiling debate won't heat up. There remains within the Republican Party some deficit hawks who could reemerge to fight back against increased outlays from the government, as many of the President's proposals have the potential to increase the nation's debt.
Gold is up 8% year-to-date. This rally is just getting started.