The longer the bill takes to pass, the more it will be watered down with compromises and influenced by lobbyists, even if it still satisfies its broad intentions. Congress also has other business to attend to. But bills can be kept alive longer than one might expect. The bill could easily enter the second quarter of 2018, a more typical timeline for many bills, and still be viable. Things start getting sketchier after that.
Mid-term campaigning will become a distraction as we move toward late summer. Current reconciliation instructions, which allow the bill to be passed with a simple majority in the Senate, expire in September 2018. A new budget could be passed with updated instructions, but we’re moving into unlikely scenarios. Mid-term elections take place on November 6, 2018. The next Congress, the 116th, will begin meeting as early as January 3, 2019. In short, the bill goes on life support in the third quarter, but could be passed as late as the fourth, although it is unlikely.
Conclusion
Based on areas of the market that have tended to move with the changing odds of tax reform, and to a lesser extent the bill’s potential impact on earnings, we believe that markets are underpricing the likelihood of tax reform passing and its potential impact. Passing a bill by the end of 2017 remains a long shot, but the first quarter of 2018 is plausible and by the end of the second quarter is very likely, in our view. At that point odds start to decline. There are challenges ahead, but the cost of failure is high. We think they’ll get it done.
John Lynch is chief investment strategist for LPL Financial.