The stock market finally fell 1% on Tuesday as all the major averages plummeted. As you can see in the chart below, the streak without a 1% decline in a day made it to the top 10 longest in history. There was only one streak in the 1990s which was longer than this streak which is impressive because I consider the 1990s rally to be the greatest in market history.
I have been discussing the idea that earnings and fiscal policy will have to drive the market higher now that the Fed isn’t supporting it with zero percent interest rates. Because these are what will drive the market, it is reasonable for me to conclude they were a factor in the selloff on Tuesday. The specific factor which I think caused the stock market to fall was the uncertainty surrounding the healthcare reform plan.
Stocks need a tax cut to grow earnings. The materials and industrials need an infrastructure plan to grow their profits. The financial, energy, and small cap firms need deregulation to cut costs. These initiatives, especially the first two, are in flux with the healthcare bill. It may be political posturing to gain support for the healthcare plan from Republicans, but President Trump stated that if healthcare reform isn’t passed by the House of Representatives on Thursday, it threatens the success of his presidency. The situation shouldn’t be this way because there’s no need to rush through such an important piece of legislation just to get to tax cuts. In the long-run it won’t matter whether tax cuts come in November 2017 or May 2018.
As I said, the key vote which will determine the fate of Ryancare is on Thursday. President Trump and the establishment GOP Congress are currently trying to coax centrist and conservative Republicans in the House to vote in favor of the bill. The plan needs 216 House votes to pass. According to the Chairman of the House Freedom Caucus, Mark Meadows, there are 22 conservatives who will vote against it. That’s more than enough to derail the bill.
You can tell the vote will be close because the supporters of Ryancare made an amendment to the plan specifically for New York to get the Republicans there to vote in favor of it. There are only 9 Republicans in the House of Representative from New York. Flipping just a few voters may be enough to get the bill passed. The New York specific change is called the manager’s amendment. It shifts Medicaid costs from local counties to the state of New York.
I have been proposing the bearish narrative that the GOP won’t be able to get fiscal stimulus measures passed before the Fed’s rate hikes start to hinder economic growth. I don’t think this narrative is hurt if the House of Representatives votes in favor of the bill because the Senate was always the tougher challenge for it as Ted Cruz, Rand Paul, and Mike Lee are staunch in their opposition to it. The bright side is that the Senate can make changes to the bill before they vote on it. For the bill’s sake, hopefully the right tweaks are made in the Senate to get it passed there.
Usually the House leadership wouldn’t schedule a vote if it didn’t think it had enough support to be passed. At this point the leadership feels it is now or never. While a vote in favor of the bill doesn’t mean it will become law, a vote against it will kill it. A vote against Ryancare won’t be the end of Trump’s presidency as he is suggesting to threaten GOP lawmakers, but it will be a significant hurdle which lawmakers will need to climb over. I think the market will selloff more than it did on Tuesday if Ryancare doesn’t pass. If it doesn’t pass, the way forward would depend on who voted against it. If conservatives kill the bill, the next iteration would either need to appeal to them or try to get Democrat support.
At the meeting with Congress, Trump called out Mark Meadows as someone he wants to convert to becoming a supporter of the bill. Because Jim Jordan and Mark Meadows said they oppose the bill after meeting with President Trump, I would say the chances of it not passing are greater than it passing. While you may think the political pressure put on by the President would be enough to sway some conservatives, many of the conservative leaders have been campaigning hard against the plan, so it would be tough to go against them as well.
Not only is the healthcare plan critical for the timing of economic stimulus measures, it also acts a signal for what will be able to get done. If Trump can convince conservatives to support Ryancare, he will be able to get them to support an infrastructure plan which adds to the deficit. If he can’t, it will signal he will have a tough road ahead getting any of his plans passed. It was risky for the market to rally on the promises Trump made to get healthcare reform and tax cuts passed because the reality is the GOP is divided among ideological lines. Just because the GOP holds a majority in both houses of Congress doesn’t mean it will be easy to get things done.
Conclusion
The market broke its streak of days without a 1% decline in one day. The market will break its streak without a 5% decline if the conservatives in the House of Representatives vote down Ryancare. The vote will be close. Both sides are claiming they have enough support. It will be a big loss of legislative momentum if the bill stalls out before taking its first step. The Fed already raised rates once and is about to raise rates in a couple months, so the GOP needs to get legislation passed to appease the market. The optimistic consumer and small business owners also need to see action to justify their positivity. As you can see in the chart below, credit card charge-offs are reaching multi-year highs, so the optimism may wane quickly.
