Ed Yardeni on the Failure of Repeal and Replace

by Marilou Moursund on March 28, 2017

in Economic Indicators,equity market,Healthcare

From today’s Morning Briefing:

This week may be dominated by the fallout from the failure of the Republicans to repeal and replace (R&R) Obamacare (a.k.a. the Affordable Care Act, or ACA) at the end of last week. The good news is that it didn’t take very long to cripple this flawed legislative initiative, which means that the Trump administration can move forward with tax reform much sooner than had been widely expected. The bad news is that the perception, right or wrong, is that the new administration has been greatly weakened by the implosion of their ACA-R&R initiative. It’s too soon to be sure of that. It’s also too soon to be sure that Obamacare won’t implode, as Trump has often claimed it would. If it does so, then he will be in a better position to repeal and replace it at that point.

For now, the so-called “Trump bump” in the financial markets may be turning into a “Trump slump.” Putting it all together: The Trump slump is replacing the Trump bump because Trump is having trouble draining the swamp. Joe and I are sticking with our assumption that a combination of deregulation and tax cuts will significantly boost S&P 500 earnings this year and next year. We still expect that tax cuts will happen this year, on a retroactive basis. If they don’t take effect until next year, however, we won’t know that until this summer, at which point the effective date won’t matter much to stocks: Either way would be just as bullish since investors by then will be focusing increasingly on 2018 anyway.

Debbie and I believe that the surge in animal spirits, as evidenced by all the soft-data economic surveys, is driven mostly by the perception that the new administration is very pro-business and anti-regulators. That hasn’t changed notwithstanding the failure of ACA-R&R. High hopes for significant tax reform might suffer a slump, but that’s not inevitable. If Obamacare remains the law of the land and succeeds, then Trump can say “no harm, no foul.” If it fails, he can say “I told you so.” Of course, Trump is still in a position to tweak the ACA with executive and regulatory actions that could either save it from a death spiral or speed up its demise.

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