Market History

Using the past to rationally predict the future.

Why Trump must repeal Obamacare and why stocks are going up either way

After the Obamacare repeal vote was pulled from the House last Friday, repeal and replace is back on the table as of Monday. With the far right finally coming to their senses, the Republicans have an open-ended deadline for repealing Obamacare. While House Republicans work on that, Trump has started working on his proposed tax cuts and budget.

There’s a simple reason why Trump MUST repeal Obamacare.

It is impossible for Trump to cut taxes significantly without repealing Obamacare. Tax cuts are part of the government’s 2018 fiscal budget. In order to cut taxes (decreasing the government’s revenue) with a simple 50% majority (which the Republicans have in both chambers), Trump must show that he can balance the budget as it is right now. If he attempts to cut taxes without balancing the budget, he needs a 60% majority (which the Republicans do not have). There is no way the Democrats will work with Trump.

This means that if Trump wants to cut taxes, he also needs to decrease government spending (thereby balancing the budget as it is right now). Trump’s original tax and infrastructure plan would have cost $2 trillion over 10 years. “Trumpcare” would have saved $1 trillion over 10 years, which is half of that amount! A border tax would have resulted in the other $1 trillion.

Now it’s clear that a border tax is impossible. Many members of the Republican party will block it. This means that Trump’s original tax and infrastructure plan has been shrunk to $1 trillion over 10 years, all of which would be funded via repealing Obamacare.

Without repealing Obamacare, Trump has almost no way to push his pro-growth policies (tax and infrastructure) through Congress. He cannot balance the budget, meaning that Trump will need Democrat support. Of course no Democrat is willing to work with Trump on cutting taxes for “the evil” corporations.

Trump could argue the old “Reaganomics” lines, but that is not enough to balance a $1 trillion decrease in government revenues! In this case, Trump might only be able to decrease the corporate tax rate from 35% to 30%, which is chicken scratch compared to his original 15% promise.

What we think will happen, and how the S&P 500 will react.

There are only 2 routes that Trump and the Republicans can take.

  1. If the Republicans can’t repeal Obamacare, Trump will have to drastically shrink his tax cut and infrastructure spending proposals. Perhaps Trump will cut the tax rate from 35% to 29% (any number under “30%” sounds good to Trump). He might push through a tiny infrastructure spending plan (e.g. $50 billion).
  2. If the Republicans repeal Obamacare, Trump can go ahead with his $1 trillion tax cuts and infrastructure spending over 10 years. This was the original plan.

The S&P will go up no matter what happens! As we said before, the U.S. stock market follows the U.S. economy in the medium-long run. The U.S. economy is growing nicely right now, which means that stocks will go up in the medium-long run with or without Trump’s pro-growth policies. Any pro-growth policies that Trump pushes through Congress will merely be extra icing on the cake.

In addition, the market already expects that the Republicans will not repeal Obamacare (after last Friday’s debacle). Any successful attempt at repealing Obamacare will merely be a positive surprise to the market. The worst case scenario (not repealing Obamacare) has already been priced in.

The only difference between these 2 scenarios is how much the S&P will go up. If the first scenario happens (not repealing Obamacare), the S&P will go up more slowly. If the second scenario happens, the S&P will party like it’s 1995 (when the S&P soared 30%+ in a year).

The surf has been really small recently.

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