“If they fail at this then the prospects for tax reform, infrastructure and defense spending will need to be rethought,” Steve Ricchiuto, chief U.S. economist at Mizuho Securities Inc., wrote in a note Friday. “The reflation trade has been the main driver of markets since the election and the legislative failure after bungling the immigration executive order.”
Ricchiuto believes that if the health-care bill fails the S&P 500 will fall as much as 4 percent from Thursday’s close and yields on the 10-year Treasury to drift back toward 2.2 percent. Yields edged higher past 2.4 percent on Friday.
Doubts about the timing of tax reform are creeping into the equity market. Companies that benefit from a corporate tax cut surged after Donald Trump’s election, but have started to lag. A Goldman Sachs Group Inc. basket of 50 S&P 500 stocks with the highest effective tax rates has fallen 2.8 percent so far this month, compared with the lowest tax basket, which is unchanged.
Bank stocks, which also stand to benefit from tax reform and deregulation, have also taken a pause after posting their longest monthly winning streak since 2013. Financial companies in the S&P 500 slumped 3.3 percent since March 17, heading toward the worst week in over a year.
There are “several implications for bank and financial stocks as well as the broader market in case the House defeats the bill,” wrote Brian Gardner, an analyst at Keefe, Bruyette and Woods Inc., in a note to clients Friday. “If the bill fails, the prospects for tax reform will decrease, which could also drag down the chances for making legislative changes to Dodd-Frank.”
This article was provided by Bloomberg News.