After Republicans failed to pass a healthcare bill last week, many feared this meant the end of the post-election stock market rally, and the start of a big reversal.
Here are 5 reasons why that’s not the case.
1. The S&P 500 is still above the short-term trend.
While the index has declined recently, it still trades above the 50-day moving average (50-DMA), an indicator of short-term trend.
In fact, the S&P 500 has been trading above its 50-DMA since the US presidential election, the longest such streak since 2011.
Source: Financial Times, John Authers’ Note
2. The volatility index is stable.
The VIX, an index that reflects volatility expectations in the market, is in line with what we’ve seen in the last couple of months. Yesterday, it closed at 12.50, below the opening level on Thursday, when voting for the healthcare bill was supposed to happen.
Volatility index (black) vs S&P 500 (green)
3. Tax reform is the key pro-growth policy, not healthcare.
While the healthcare bill was certainly relevant for specific sectors, it had very little impact on the aggregate market. On the other hand, tax reductions can potentially boost company’s earnings and increase overall economic growth. This is why tax reform is the key policy change that matters for investors.
According to Goldman Sachs, a 5 percentage point decrease in corporate taxes would boost return on equity (ROE) by 1% and increase earnings per share (EPS) of S&P 500 companies by about 6%. The Trump administration is expected to reduce corporate taxes by 10-15 percentage points from the current 35%, which would mean a 2-3% increase in ROE and 12-18% increase in EPS.
Investors have been gradually adjusting expectations for the timing and size of tax changes since before the healthcare bill failed to pass. We can see this in the relative performance of “high tax rate” companies, i.e. the ones that would benefit the most from a tax decrease.
This group of companies is trading at below election day levels, which actually means there is room for an upside surprise if Trump succeeds with tax reform.
4. The bond market is stable.
Interest rates remain close to the same levels that we’ve seen in the last few months, meaning there is no sign of a reversal in sentiment.
Source: Financial Times
5. Global economic news are still positive.
Global economic indicators remain above expectations, suggesting good overall performance. The “Citi Global Economic Surprise index” measures how often global economic data is better than expected, and it’s at the highest point since the aftermath of the financial crisis.
Source: Financial Times
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