What Happens in Washington Matters to Markets

With the recent Senate decision not to implement even a so-called skinny repeal of Obamacare, the Trump administration is at crossroads. President Donald Trump, and some of his senior advisers, would still like to pursue a repeal of the existing health-care structure. Several senators and congressmen would, instead, prefer to focus on corporate and personal tax cuts in an effort to boost growth.

Although reforming health care and achieving annual gross domestic product growth of 3 percent or more were both important Trump campaign promises, which objective the administration pursues first would have major implications for investors. Specifically, emphasis on health care as the top priority would lead to disappointment for equity investors. Financial market participants were hoping to benefit from dismantling onerous regulations, cutting corporate taxes and introducing plans for infrastructure spending. Realistically, the U.S. Congress can’t handle both major issues at the same time.

With sharply divergent views even among Republicans on issues ranging from covering patients with pre-existing conditions to maintaining payments to insurers to subsidize low-income participants, no quick resolution to the health care debate is likely. Top officials such as Treasury Secretary Steven Mnuchin also have to persuade Congress to increase the federal debt limit — Bloomberg Intelligence estimates that the U.S. government will run out of money as soon as Oct. 3. A default on Treasury debt, or a government shutdown, would be among the consequences of not passing a debt bill on time.

Such competing pressures mean that if health care does stay on the congressional agenda, tax reform and deregulation may not happen before 2018, at the earliest. In addition, failure of the much ballyhooed health-care effort has led to recriminations among Republican members of the Senate, and deteriorating relations between the Senate and Trump. If Trump and the Senate try yet again to repeal Obamacare and fail, investor confidence in a subsequent passage of market-friendly reforms is likely to take another hit, with unfavorable implications for the equity market.

Equities don’t reflect such investor concerns yet. A healthy increase in U.S. corporate profits through the second quarter helped push markets to new records, leading some analysts to suggest that any policy impasse in Washington is of little consequence for financial markets. Some even say that government inaction would be a positive development since it would mean less interference in the market mechanism.