The Trump rally that has sent stocks almost 10% higher since the election, up to record highs, could be in jeopardy.
It's been based largely on expectations for tax reform, deregulation and, to a lesser extent, a major infrastructure spending package, but now expectations for tax reform seem to be shifting.
"Tax reform could take 10 to 18 months to pass, with a growing risk that it won't be as dramatic as advertised two months ago," wrote Greg Valliere, chief global strategist at Horizon Investments in his latest Capital Notes.
The sticking point is a border adjustment tax, which would increase taxes on companies that import products such as retailers while cutting them for exporters, raising $1 trillion over 10 years. Major retailers like Target and Walmart, which import many goods, oppose this tax, and that's complicating efforts to pass any tax measure, according to Valliere.
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"The specifics of tax policy are going to make a big difference," says Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors.
He foresees a struggle between those Republicans who want to offset tax cuts with revenue raisers such as the border tax and elimination of the corporate tax deduction for interest payments and those who aren't as concerned about the offsets.
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Those offsets "really count," says Johnson, so "nobody knows what the configuration of the tax cuts will be or the timing. … If there is no border adjustability tax there may be no tax cuts at all or not until 2018."
Despite those concerns Johnson is maintaining his stock allocations, but not adding to them.
Mohammed El-Erian, chief economic advisor of Allianz and former CEO of PIMCO, sees a different tug-of-war affecting stocks, one between tax reform, infrastructure spending and deregulation, which offer the prospect of "healthy reflation" and policies such as trade protectionism that risk stagflation, according to a recent Bloomberg View post.