Trumpcare defeated, tax reform on the horizon: How might financial markets react?

In today’s episode of Market Week in Review, Rob Cittadini, regional director, consultant relations, talked with Chief Investment Strategist Erik Ristuben about the U.S. Senate’s failure to enact new health care legislation, and what that could mean for corporate tax reform efforts.

Trumpcare goes down—is tax reform up next?

Ristuben believes that the inability of the U.S. Senate to pass a bill on health care reform, otherwise known as Trumpcare, is important to financial markets—somewhat. In his view, the markets are likely to take the demise of Trumpcare as a mixed blessing. On the one hand, Ristuben said, there were some potentially stimulative aspects to the bill that may have been good for the economy on the margin, such as tax cuts related to health care. On the other hand, the failure of Trumpcare means that corporate tax reform will probably be taken up next by the U.S. Congress—which he believes markets will view as a net positive.

“The markets will like the focus shifting to tax reform, but people should have more moderate expectations of what will come out of that,” Ristuben explained, adding that the original plan was for Congress to use the savings in Medicaid spending from Trumpcare to give larger corporate tax cuts. In his view, what’s most likely to be addressed is a simplified tax code. He does forecast some cuts—but not as deep as what many have been hoping.

U.S. inflation stays low

Shifting to recently released U.S. economic data, Ristuben noted that the gross domestic product (GDP) growth rate for the second quarter came in at 2.6%—in line with the expectations from Ristuben and other Russell Investments strategists. Also noteworthy is that the data showed low inflation and no real wage pressure.

Interestingly enough, Ristuben said, is that a statement released by the U.S. Federal Reserve (the Fed) after its meeting this week appeared to be mildly dovish. Whereas a statement earlier in July referred to inflation as running “somewhat below 2%,” this week’s statement omitted the word “somewhat.” In Ristuben’s view, this means that the lack of inflationary pressure is now on the Fed’s radar screen. “This is probably not going to allow the Fed to raise rates in the second half of the year,” he remarked.

European economic growth data: What’s the latest?

Cittadini and Ristuben then turned to the latest economic growth data for the Eurozone, which Ristuben views as mixed. He noted that the composite Purchasing Manager Index (PMI®) for the Eurozone came in slightly below consensus expectations.

On the positive side, consumer confidence in Europe was up for the third straight month, according to data from the European Commission. The outlook was particularly rosy in Germany, where consumer confidence reached a 16-year high, per the GfK consumer sentiment indicator.

Conversely, the STOXX® Europe 600 index was down a little over 2% this week. The weakness in this index is probably due to the fact that the Euro appreciated over 2.5% versus the dollar this past week, Ristuben said. “A strong Euro is a headwind for the economy—but it’s a headwind of strength,“ he concluded, emphasizing that all things considered, it was a good week for Europe.

Watch the video.