Traders Retreat before Trump Address to Congress

Traders Retreat before Trump Address to Congress

With Pres. Donald J. Trump due to give his first address to a joint session of Congress on February 28, equity investors seemed to pull back on new buying Friday, sending stocks lower across the board. Crude oil dropped after advances early in the week, following an inventory report that showed a continued increase in US reserves despite an OPEC output cut. 

Barack Obama addresses joint session of Congress |
Barack Obama addresses joint session of Congress | Wikimedia Commons CC 2.0

President Trump's remarks on Friday to the annual Conservative Political Action Conference in Maryland were largely about politics, with attacks on the media, leakers, and the FBI. The president has yet to make a detailed speech on tax and spending priorities for the coming year and beyond. Next week's address to Congress is expected to be such a speech. 

With monetary policy now less of an uncertainty, it seems natural that investors would look for more information on fiscal policy. On the monetary front, the Fed has now given consistent signals that it has enough confidence in the economic progress of the last several years, particularly on inflation and employment, to raise interest rates this year. The most common prediction remains that the Fed will raise rates three times, beginning in May. 

Fiscal policy, on the other hand, still holds a number of unanswered questions. Investors in large-cap equities, which is most big investors, are obviously concerned about tax cuts for large corporations. In the short-term, such tax cuts could boost corporate profits, which in turn could raise share prices. While the long-term benefits of corporate tax-cutting is still one of the major economic debates, in the short-term, the effects are fairly predictable and, for shareholders, desirable. 

While most people expect Trump to discuss tax cuts, both for corporations and individuals, investors will likely be looking for specific numbers or legislative initiatives. During the campaign, the president had expressed openness to lowering capital gains and the top nominal individual tax rate. 

On the spending side, some of the priorities now expected to see their way into law include increased military spending; a replacement for the Affordable Care Act, known as Obamacare; a possible 15,000-strong deportation force; and a wall along the US-Mexico border which some estimates say will cost over $20 billion. The president insists that Mexico will eventually reimburse the US for the cost of the wall; Mexico has stated it will not. 

Whatever role expectations may have played in driving the post-election rally, those expectations will now be joined by proposals and actions in the months ahead. The math behind cutting taxes, increasing spending, and reducing the deficit all at the same time requires economic models that have never been proven but may now get tested. Long before that happens, however, traders will encounter plenty of volatility and market movements which they could potentially profit from. The future for traders is unlikely to be boring.

Crude oil prices gave back earlier gains after reports of US inventory showed continued accumulation of petroleum reserves. OPEC members are believed to be sticking to their commitment to cut output. Reducing output is an effort to reduce overall supply and thereby raise oil prices. While the output cut probably played a role in getting oil back above $50 a barrel, the news that the US still has plenty of oil on hand and in production puts a damper on hopes of squeezing supply to raise prices further.

Also over the weekend, Warren Buffett will release his annual letter to shareholders of Berkshire Hathaway stock. The company is expected to show positive earnings, but some will also read it to see if Buffett restates his long-held belief that tax cuts for wealthy individuals like him are unfair and economically unsound, an increasingly popular view among millionaires and billionaires, but not shared by the White House or Congress and not expected to see its way into policy soon. The timing of the two events, the letter and the address, is coincidence, but tax policy specifics are likely to be in the news next week and beyond. 

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