Stock surge raises pressure on GOP to deliver

Stock surge raises pressure on GOP to deliver
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Wall Street’s sky-high expectations have raised the stakes for Republicans aiming to overhaul the tax code.

Stocks have surged since President Trump’s election, in part because investors are betting that Republicans will follow through on their promise to slash corporate tax rates.

But the rapid rise in the stock market has alarmed regulators and traders, who fear there will be a sharp downturn if the GOP’s tax legislation collapses. Even Trump administration officials have acknowledged that possibility, warning Republicans that failure is not an option.

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Treasury Secretary Steven MnuchinSteven Terner MnuchinOn The Money: Fed chief lays out risks of trade war | Senate floats new Russia sanctions amid Trump backlash | House passes bill to boost business investment The Hill's Morning Report — Trump isolated and denounced after Putin meeting IRS reduces donor reporting rules for some tax-exempt groups MORE said last month, “There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done.”

After years of steady gains during former President Obama’s second term, U.S. stocks soared in the months after Trump’s election. The Dow Jones industrial average and the Nasdaq composite have both climbed roughly 24 percent since November 2016, while the Standard & Poor’s 500 index has risen roughly 20 percent.

Trump has frequently bragged about the surge in the stock market on his watch, touting it as evidence that his administration is succeeding.

“The reason our stock market is so successful is because of me. I’ve always been great with money, I’ve always been great with jobs, that’s what I do,” Trump told reporters earlier this month.

Republicans in the House and Senate are pursuing an overhaul of individual and corporate taxes they say will jump-start the economy and create jobs. Their goal is to get a bill to Trump’s desk by Christmas.

While their legislation differs in many ways, both the House and Senate are pushing to cut the corporate tax rate from 35 percent to 20 percent. Both bills would also move the U.S. to a territorial tax system, where businesses are only taxed on their domestic earnings.

“There is great confidence in the moves that my Administration is making. Working very hard on TAX CUTS for the middle class, companies and jobs!” Trump tweeted recently.

Republicans have long insisted that American corporations are disadvantaged by the country’s 35 percent corporate tax rate. They argue the rate applied to corporate earnings encourages executives to keep profits offshore, preventing them from growing their company and hiring more employees.

Businesses eager to slash their tax bills and financial services firms eager to reap the benefits have supported the GOP push with millions of dollars in ads and advocacy. The promise of lower tax rates has also pushed investors to shovel billions more corporate stocks, driving much of the year’s major gains.

But some economists have warned about the risk of staking too much on a tax overhaul.

The International Monetary Fund (IMF) last month said it no longer expected the United States to boost its economy through fiscal policy changes and pushed back on the GOP’s argument that cutting taxes would expand the economy.

The lender revised down its forecast for U.S. economic growth from 2.3 percent to 2.1 percent in July and called on countries with significant debt to raise taxes to protect their financial stability.

Trump administration officials fired back at the IMF, arguing the lender had a vested interest in preventing the U.S. from revamping its fiscal policy.

Even so, Mnuchin warned that failing to pass a tax overhaul by the end of the year could trigger a massive stock sell-off.

“So I think to the extent we get the tax deal done, the stock market will go up higher,” Mnuchin said. “But there’s no question in my mind if we don’t get it done, you’re going to see a reversal of a significant amount of these gains.”

Investors seem keenly attuned to what’s happening in Congress with the tax legislation.

Last week, the Dow dropped more than 200 points after The Washington Post reported that the Senate tax bill would delay the corporate rate hike until 2019. Stocks have opened in the red since then.

“As the tax debate intensifies, investors are becoming more skeptical,” Peter Cardillo, chief market economist at First Standard Financial, told CNBC. “I think the market is caught in a reality check right now.”

And while the House’s tax bill seems likely to pass this week, several GOP senators have expressed concerns about both bills’ impact on the federal debt and the treatment of tax credits for low-income families.

Dan Alpert, managing partner at investment firm Westwood Capital, said markets have failed to reflect the challenges of passing major tax legislation and the threat of Trump’s nationalist trade agenda to global commerce.

“We are at a major turning point,” Alpert said. “There’s great concern that the globalization that has fostered the kinds of prices you’ve seen in the stock markets is going to be easily challenged in the coming months and years.”

Alpert added that he doesn’t think either of the sweeping tax overhaul bills will pass, given concerns among Republicans about deductions for high state and local taxes preventing tax-base erosion.

“Tax and trade are the two big unknowns going into the next 12 months,” Alpert said. “No one knows where the administration is going to come out.”