Is the Trump rally about to unwind?

After Friday’s healthcare policy rejection, the focus turns to whether Trump will be able to pass his fabled tax plans. If he doesn’t, this could be the end of the Trump trade.

Capitol
Source: Bloomberg

Friday’s rejection of Trump’s healthcare plans came as a bitter blow to the newly installed president, given that it represents a growing trend in Washington. It is one thing appointing a president who comes with such radical policies, it is quite another passing those policies through Congress. First came the travel ban, then came the healthcare plan, and now we move on to the tax reforms. There is no doubt that from the market perspective, the taxation plans will be by far the biggest issue so far, given that we have seen such substantial gains across equities after a promise to greatly reduce the amount that corporates will be paying in the future. Unfortunately, there is nothing to suggest that this will be any easier to pass than the healthcare reforms, with issues such as border tax likely to draw a considerable range of views.

Trump’s plan to cut taxes for corporations is something that in most countries would raise a significant degree of negative press, but within this bill it is probably one of the less controversial issues. For a multi-billionaire who won the presidency by being a champion for the forgotten people, the fact that we are seeing a swift decision to cut taxes for corporations and the highly wealthy should raise questions for many. However, it is the focus upon what this could do for job creation that has many excited. With US unemployment currently standing at 4.7% (a decade low), it is worth noting that US unemployment is pretty much at full employment, with historical records showing the figure rarely goes below the 4.0% mark. With that in mind, there is a chance that a spurt in job creation could cause a battle for a finite amount of talent, thus driving up corporate costs and wages higher.

Perhaps the most controversial policy for Trump to pass is the border tax for goods being produced abroad. This type of protectionism is unlikely to be popular in Washington, with lobbyists already seeking to influence key figures to promote their business interests.

The problem with a border adjustment tax is that there is a fear that it will raise prices for American consumers, while raising the chance of a tit for tat protectionist trade war, where other nations begin to treat US products differently. The creation of a pro-border tax coalition amounted to 25 US companies, who believed the plan has merit in terms of bringing jobs back to the US. Meanwhile, the Retail Industry Leaders Association (RILA), comprising of over 120 companies and trade associations created a counter-coalition to fight the tax all-together. In a world, where a product is made of multiple globally sourced parts, the decision to raise import taxes would dramatically raise input costs. While the hope is that by cutting corporate tax, the firm would not need to shift the burden onto the consumer, it would surely result in greater inflation. That inflation would push the Federal Reserve to a tighter monetary policy stance.

Ultimately, it is clear that the benefits of Trump’s tax plans are debatable. Should we see a rebuttal of the tax policies, it is highly likely that we will see the Trump trade unwind in style. One of the main beneficiaries of the Trump trade have been US stocks, with both the Dow Jones and S&P 500 having rallied around 15% since the lows of election day. The daily S&P 500 chart below highlights that we have broken below both trendline and 50-day simple moving average (SMA) support today. It also shows how little we have sold off in the grand scheme of things. A failure to seal the deal in Washington could see this market turn lower in an incredible manner.

The other main market affected by the Trump trade is the US dollar, which suffered heavily by Trump’s failed healthcare policy. Crucially, we have seen a bearish head and shoulders formation completed this morning. That said, with the price moving into trendline and SMA (200-day) support, we are set for a major hurdle in this current downtrend. The collapse of Trump’s tax plan could see this market tumble in a dramatic fashion.

With the tax plan still a few months away, it is likely that we could see markets settle somewhat, yet for now the ongoing theme is one of increasing doubt, which could continue to creep into investor mindset. Perhaps we are finally set for a period, when buy-on-dip investors will be less convinced than in the last six months. Then again, on the flip-side, there will be some who see this as a great opportunity to get into the Trump trade at an advantageous price. It all comes down to whether the tax reforms will be added to the growing list of Trump’s cornerstone policies which have been shot down in one way or another.

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