This special guest commentary was written by our friend Mike O'Rourke of JonesTrading
Yesterday the first legitimate signs of the execution risks related to “Trump Trades” emerged in the market. Some risks were associated with policies that may not come to pass, and some were associated with policies investors were fearful would come to pass. Republican Senators have begun to revolt against the Border Adjustment Tax (BAT).
In turn, political analysts are modifying their models to try to find a way to find the revenue to finance corporate income tax cuts. The stark reality is that it is essentially impossible to get to the Congressional Republican’s 20% rate. There is no doubt the President’s 15% rate is a near impossibility. These rising doubts may have resulted in pushing President Trump closer to the Congressional Republicans.
Although it was lukewarm, in an exclusive Reuters interview today, for the first time, the President expressed approval of a Border Adjustment Tax. The headline hit late in the day and sent a number of retailers and apparel related companies lower because they are the largest importers in the country (chart below).
The market also responded to reports that the President’s aggressive infrastructure agenda will likely be delayed until next year. It was exactly a week ago that JonesTrading hosted a call with Washington Lobbying firm Williams & Jensen.
On the call, W&J noted that the legislator on Capitol Hill most closely aligned with President Trump is Democratic Senate leader Chuck Schumer. That gives an indication of how far down the priority list infrastructure is. We summarized the W&J comments from last week,
“Another key area of note is the plan for infrastructure spending. While it is an issue high on the President’s priority list, many of the Republicans in Congress view it as simply another form of spending and shirking fiscal responsibility.”
We noted earlier in the week that with the exception of steel companies, many of these names have begun to pull back. There was widespread weakness among these shares with our infrastructure basket losing 4.2% on average today (chart below).
Interestingly, while these policy problems influenced performance in their defined spaces, they did not manifest in the broad market today as another round of new highs were registered. That being said, the developing trend appears to be that as more details emerge, so do more challenges. There’s a reason they say “the devil is in the details.”
This is a Hedgeye Guest Contributor research note written by Michael O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.