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Put These Two Events on Your Investing Radar

Put These Two Events on Your Investing Radar
March 31
10:29 2017

(InvestorAlley) – Knowing how these two events could affect your portfolio over the next month might be the difference between you having a successful 2017 or a nightmare year. See what Bret Jensen is watching for in the market right now and how to position your portfolio for success.

After last week’s debacle in the House, where Republicans had to withdraw their efforts to repeal and replace the Affordable Care Act, we don’t quite yet know what the ramifications for this will be. The party that ran for four election cycles promising to get rid of “Obamacare” failing unlikely bodes well for the Grand Old Party in the 2018 mid-terms. This is especially true if the administration fails to also enact other major campaign promises.

Other than the hospital stocks that rallied on the withdrawal of the bill, the rest of the market had a poor week. The NASDAQ, S&P 500 and DJIA all suffered losses between 1.2% to 1.5% on the week, which were their worse weekly performances so far of 2017. The small cap Russell 2000 was down three and a quarter percent and is now down for all of 2017 as well.

Equities staged a substantial rally after the election on the hopes of significant tax and regulatory reforms, to the consternation of most pundits who predicted the opposite. These initiatives, if enacted, would boost economic and job growth as well as boost company profits and therefore earnings.

However, if these initiatives are more likely to stall as the result of last week’s debacle, how much of the post-election rally will evaporate. Therefore, I think it is imperative that the Trump administration is successful in pivoting back to tax and regulatory reform.

SEE ALSO: Buy These 2 Dividend Stocks with Double-Digit Yields

The president can do some minor things on his own to boost job and economic growth such as last week’s greenlighting of the long-stalled Keystone pipeline. To succeed on a macro level, he must work through congress.

Here is what I will be watching in the coming weeks to see if the administration can put the disappointment of this failed effort behind it and successfully push through other efforts that the market is expecting.

The first thing I will be looking for is to see if the Republican party can quickly put this debacle behind it and refrain from forming a circular firing squad and bringing out the long knives. However, if the failure of repeal and replace effort claims scalps like Trump’s Chief of Staff or forces Paul Ryan, the Speaker of the House out, this could point to escalating turmoil in the party.

In this scenario, investors will ratchet down their expectations of anything major being enacted in the administration’s first year and the market will probably not react kindly to that sort of news.

If the party can refrain from killing its own, the next thing to look for is what is the general shape of the tax reform package and whether solid support is lining up behind it. This is critical as the party only can lose two votes in the Senate as the Democrats will oppose any tax reform in mass.

I will also want to see if the tax reform pledge includes a “tax holiday” so firms can effectively bring home some of the over two trillion dollars they have “stranded” overseas, this could be good for tech giants like Apple (NASDAQ: APPL) and Microsoft (NASDAQ: MSFT) as well as major drug makers like Pfizer (NYSE: PFE). All of which have tens of billions parked outside the United States.

I think if tax and regulatory reform efforts start to make significant progress, sentiment should improve on the small and mid-cap parts of the market which have not moved much in 2017 so far. No one bears the burden more of the current tax and regulatory structure than these parts of the market. On average, small and midcap stocks send five cents more to the government from every dollar of profit than their large cap brethren as their effective tax rates are generally higher and they have little operations outside the United States.

The burden of current regulations are hard to overstate as well, especially for smaller firms. The previous administration added record amounts of pages to the Federal Register in its eight years in office. By some tabulations, almost $200 billion in additional regulation costs were added in 2015 alone.

Small banks have been particularly burdened by new regulatory costs since the financial crisis. The government passed all sorts of new compliance rules since the financial crisis, most of which did not discriminate between the Bank of America’s (NYSE: BAC) of the world and the small and regional banks.

Small banks like Capital Bank Financial (NYSE: CBF) have made big runs since the election on the hopes of regulatory reform as well as rising interest rates. If regulatory reform proceeds, I could see these names rising further. However, if these efforts stall, the pullback in this sector, like the one that we saw last week, could be just the beginning, and the overall market might have a tough time rising from these levels as well.

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2 Key Investing Events That Should Be On Your Radar

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