On the same day that the Dow Jones industrial average topped 21,000, reaching a new intraday and closing record, Vincent Reinhart, chief economist of Standish Mellon Asset Management, told a luncheon gathering focused on President Trump's first 100 days in office that the "market pricing in too much too soon … expecting too much out of DC. The policy process always takes longer."
He should know. Reinhart spent more than 20 years in Washington, working for the Federal Reserve in various positions including director of its monetary affairs division and economist of its policymaking Federal Open Market Committee (FOMC) before becoming resident scholar at the American Enterprise Institute and then chief economist at Morgan Stanley.
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Underpinning the recent rally in the stock market are expectations for corporate and personal income tax cuts as well as repeal or loosening of federal regulations, seen as helping to drive economic growth.
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But while some efforts at deregulation are already underway – think of the proposed delay of the Labor Department's fiduciary rule and the introduction of a House bill giving the White House, through the Office of Management and Budget, the power to reject regulatory plans of federal agencies – tax reform is not.
"Until an Obamacare replacement is clear, tax reform will stay on the back burner," wrote Greg Valliere, chief global strategist at Horizon Investments, in a recent edition of his Capitol Notes.
Trump said as much Monday before the National Governors Association: "We have to do health care before we do the tax cut." He also said that tax reform is a "tiny ant" compared to the replacement of Obamacare.
Not only will investors have to wait for tax reform, but the changes may not be as expansive as they would like.
At the luncheon sponsored by BNY Mellon Investment Management, Sinead Colton, head of investment strategy at Mellon Capital, said that one of the biggest risks U.S. markets is "disappointment" that the corporate tax reform may not be as significant as expected and personal tax cuts may be fewer in number.
