As we head into Spring and the period between when companies report their quarterly earnings (earnings season), the attention is turning to the economic and political events of our country to determine price action (whether prices go up or down).
Three items are of particular interest to me:
1.) The potential for a Fed interest rate hike on 3/15
2.) The mid-month Debt Ceiling decision
3.) The variety of items emanating from the White House
The meeting of the Federal Open Markets Committee (“The Fed) will take place on March 14th and 15th. When we speak of the Fed ‘raising rates”, we are referring to the Fed Funds Rate. This is the rate at which the banks charge each other to borrow money on an overnight basis. To make a long story short, the lower the Fed Funds rate, the higher the motivation for the bank to find other places to lend, thereby , stimulating the economy. More importantly, banks use the Fed Funds rate as a benchmark to set other interest rates. It is here that the Fed funds rate impacts, not just the rate that banks charge each other, but also the rate on your mortgage, home equity loan, car payment and the rate that businesses pay to borrow.
The nations “Debt Ceiling” was put into place nearly a century ago to ease the burden of the country’s ability to finance certain expenditures. It removed the need to go to Congress every time they borrowed money. Now, raising the debt ceiling is not a means to authorize new purchases, but rather as a means to pay bills that have already been incurred. This is a complicated issue. If the debt ceiling is not raised, or there is considerable uncertainty and debate surrounding, the talk will begin of the United states possibly defaulting on its debt. On March 16th, 2017, the debt ceiling for the country will be at $20.1 trillion. As you can see from The U.S. National Debt Clock , we are currently close to $20 trillion. The uncertainty around the debt ceiling is definitely something that could create a pullback in the stock market.
The third, and likely most important potential catalyst for the market, is the unprecedented amount of turbulence coming from the new administration in Washington. As I’ve relayed to many of you in our private conversations, my opinion is that the market’s significant move since the election is based on the “dream” that he will bring to fruition many of his campaign promises. We have seen the initial jousting over the Immigration ban and , yesterday, the proposed repeal and replacement of Obamacare. While these are clearly, important issues that can have an impact on domestic and world markets, I believe that the number one issue that is propelling the markets higher is the confidence that the President will accomplish his corporate tax agenda.
President Trump is proposing that the corporate tax rate be reduced from 35% to 15%. A reduction of this magnitude in corporation taxes will have a direct and dramatic impact on corporate net income, obviously. This increase in corporate net income should, in theory, have the same direct and dramatic increase in stock prices. The stock market, more than anything, trades on expectations, in my opinion. The expectation that I believe is continuing to be built into the market is that of this corporate tax impact. Over the coming months, the markets perception of the ability for this tax plan to pass, and the relative difficulty in passing it, will be the single most important determination of stock price appreciation or depreciation.
I also remain highly interested in President trump’s infrastructure plans. There was a belief that he would attempt to finance his vast plans for infrastructure improvement by floating a thirty year, $1 trillion bond. I read today that the proposal, if entered now, would be for $1.5 trillion. That’s a lot of dough, Joe! Regardless of the amount, I believe that this administration will gamble on mortgaging the future. That’s almost a given, in my opinion. I’ll write more on this story another time. Don’t be surprised if the funding for this project comes in around $550 billion.