Tax reform failure is still a potential headwind for US stocks

By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of


  • Last-ditch GOP effort to dismantle ACA scheduled for this week
  • Last trading week of the quarter is coupled with a busy economic calendar
  • Last week’s FOMC announcement falls inline with expectations
  • The third Q2 topline GDP estimate, due Thursday, is expected to tick higher, to 3.1%
  • Durable goods orders for August are expected to reverse higher from July’s sobering 6.8% reading
  • Senator John McCain (R-Ariz.) has the last word on the ACA — and potentially on tax reform

Volatility S&P 500 (^VIX) 10.60
Interest Rate 10-year note (CBOE) (^TYX) 2.22%
WTI Crude Oil (Nymex) (CL=F) $51.76/bbl
Gold (Comex) (GC=F) $1,313.40/t. oz.

Federal Reserve surveys and Fed speak

Now that last week’s focal point for investors, the September FOMC announcement, is behind us and given that nearly all the ancillary economic data released in the week was constructive, this week’s equity trading will be dominated by several themes of significance: (1) A very busy economic calendar, (2) the GOP’s last ditch effort to repeal and replace the ACA, and (3) a more detailed look into the tax reform effort. (It was genuine privilege to be included, along with Bill Gross, in China’s Tencent Finance coverage of Wednesday’s FOMC announcement and Chair Yellen press conference.)

The economic calendar, not unlike most final weeks of a quarter, is full. Through the lens of the Federal Reserve, regional manufacturing will dominate the narrative. On Monday, the Chicago Fed National Activity Index fell to -0.31, the weakest reading since August of last year. However, despite Hurricane Harvey, the Dallas Fed Manufacturing Survey printed a strong 19.5, led by a 4.3 point gain in the General Activity Index. New York Fed President Bill Dudley confirmed the likelihood of a gradual path of future rate hikes based on his assessment that the factors depressing price inflation are “fading.”

On Tuesday, we receive the Richmond Fed Manufacturing Index. On Thursday, the Kansas City Fed Manufacturing Index is on tap. Away from Federal Reserve gauges of manufacturing, there are 12 talks by Fed officials on the weekly calendar (again, not uncommon the week following an FOMC announcement). The highlight of the talks will be Chair Janet Yellen’s scheduled appearance on Tuesday at the 59th National Association for Business Economics Meeting in Cleveland, Ohio.

Other economic releases that stand out this week include new home sales and consumer confidence on Tuesday, durable goods and pending home sales on Wednesday, GDP and corporate profits on Thursday, then personal income and outlays plus consumer sentiment on Friday.

Health care and tax reform prospects also fading

McCain, a long-time nemesis of President Trump, appears to be relishing his role as spoiler. Not only has McCain stated that he will withhold his support for the GOP Graham-Cassidy Bill, but in doing so, has effectively also had a negative impact on the likelihood of Trump getting his tax reform legislation passed by Congress. The Graham-Cassidy bill was expected to reduce federal government outlays and deficit spending by up to $200 billion from 2020-2026. Without those savings — a bedrock of the anticipated tax reform legislation — any significant legislative moves toward tax reform have likely been stymied, or at the very least dramatically altered. In the event the GOP does manage to keep tax reform on the agenda — irrespective of the potential failure of repeal and replace — any progress will ultimately require a good deal more compromise with Democrats than originally expected.

It is no secret that much of the equity market march higher we have seen this year has been predicated on significant tax reform legislation passing this year. In the event that does not materialize, there is a distinct possibility that equities will face an unexpected headwind as we head into and through Q4. There is a great deal riding on this week’s legislative agenda—not only for Washington, but also for equity markets. That said, equity market performance will ultimately be directed by earnings and guidance.

As we head into earnings season, US equities remain in a confirmed uptrend with small caps (^RUT, IWM) leading the charge higher on the Nasdaq (^IXIC, QQQ), while financials (XLF) continue to outpace the broader market. In recent weeks, the S&P 500 (^GSPC, SPY), for example, has risen nearly 7%. The distribution day count on all majors has dropped dramatically, suggesting that the move higher that we have witnessed is a direct result of increased institutional sponsorship.

Economic calendar (all times Eastern):


8:55 a.m. Redbook

9:00 a.m.  S&P Corelogic Case-Shiller HPI

10:00 a.m. New Home Sales

10:00 a.m. Consumer Confidence

10:00 a.m. Richmond Fed Mfg Index

10:00 a.m. State Street Investor Confidence Index

Charles Evans,  9:30 a.m. 

Loretta Mester,  9:30 a.m. 

Janet Yellen, 11:45 a.m.  

Raphael Bostic,  12:30 p.m.


7:00 a.m. MBA Mortgage Applications

8:30 a.m. Durable Goods Orders

10:00 a.m. Pending Home Sales

10:30 a.m. EIA Petroleum Status Report

Neel Kashkari,  9:15 a.m.

James Bullard,  1:30 p.m.

Eric Rosengren,  7:00 p.m.


8:30 a.m. GDP

8:30 a.m. International Trade in Goods

8:30 a.m. Weekly Jobless Claims

8:30 a.m. Corporate Profits

9:45 a.m. Bloomberg Consumer Comfort Index

11:00 a.m. Kansas City Fed Manufacturing Index

Esther George,  9:45 a.m.


8:30 a.m. Personal Income and Outlays

9:45 a.m. Chicago PMI

10:00 a.m. Consumer Sentiment

1:00 p.m. Baker-Hughes Rig Count

Patrick Harker,  11:00 a.m.

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