Why Trump must repeal Obamacare and why stocks are going up either way

After the Obamacare repeal vote was pulled from the House last Friday, repeal and replace is back on the table as of Monday. With the far right finally coming to their senses, the Republicans have an open-ended deadline for repealing Obamacare. While House Republicans work on that, Trump has started working on his proposed tax cuts and budget.

There’s a simple reason why Trump MUST repeal Obamacare.

It is impossible for Trump to cut taxes significantly without repealing Obamacare. Tax cuts are part of the government’s 2018 fiscal budget. In order to cut taxes (decreasing the government’s revenue) with a simple 50% majority (which the Republicans have in both chambers), Trump must show that he can balance the budget as it is right now. If he attempts to cut taxes without balancing the budget, he needs a 60% majority (which the Republicans do not have). There is no way the Democrats will work with Trump.
This means that if Trump wants to cut taxes, he also needs to decrease government spending (thereby balancing the budget as it is right now). Trump’s original tax and infrastructure plan would have cost $2 trillion over 10 years. “Trumpcare” would have saved $1 trillion over 10 years, which is half of that amount! A border tax would have resulted in the other $1 trillion.
Now it’s clear that a border tax is impossible. Many members of the Republican party will block it. This means that Trump’s original tax and infrastructure plan has been shrunk to $1 trillion over 10 years, all of which would be funded via repealing Obamacare.
Without repealing Obamacare, Trump has almost no way to push his pro-growth policies (tax and infrastructure) through Congress. He cannot balance the budget, meaning that Trump will need Democrat support. Of course no Democrat is willing to work with Trump on cutting taxes for “the evil” corporations.
Trump could argue the old “Reaganomics” lines, but that is not enough to balance a $1 trillion decrease in government revenues! In this case, Trump might only be able to decrease the corporate tax rate from 35% to 30%, which is chicken scratch compared to his original 15% promise.

What we think will happen, and how the S&P 500 will react.

There are only 2 routes that Trump and the Republicans can take.

  1. If the Republicans can’t repeal Obamacare, Trump will have to drastically shrink his tax cut and infrastructure spending proposals. Perhaps Trump will cut the tax rate from 35% to 29% (any number under “30%” sounds good to Trump). He might push through a tiny infrastructure spending plan (e.g. $50 billion).
  2. If the Republicans repeal Obamacare, Trump can go ahead with his $1 trillion tax cuts and infrastructure spending over 10 years. This was the original plan.

The S&P will go up no matter what happens! As we said before, the U.S. stock market follows the U.S. economy in the medium-long run. The U.S. economy is growing nicely right now, which means that stocks will go up in the medium-long run with or without Trump’s pro-growth policies. Any pro-growth policies that Trump pushes through Congress will merely be extra icing on the cake.
In addition, the market already expects that the Republicans will not repeal Obamacare (after last Friday’s debacle). Any successful attempt at repealing Obamacare will merely be a positive surprise to the market. The worst case scenario (not repealing Obamacare) has already been priced in.
The only difference between these 2 scenarios is how much the S&P will go up. If the first scenario happens (not repealing Obamacare), the S&P will go up more slowly. If the second scenario happens, the S&P will party like it’s 1995 (when the S&P soared 30%+ in a year).

The surf has been really small recently.

8 comments add yours

  1. Hindsight is 20/20 but I think they should have tried to get a tax deal done first before working on getting rid of Obamacare. This may have brought both sides together, some members anyways. The healthcare bill was too rushed and unorganized. Not a good look for a group that imposed their own deadline. Healthcare is a massive project and they should take the time to get it right. I would imagine something will get passed sooner or later as Obamacare sinks.

    • Trump made an error here. He thought that Obamacare repeal would be the easiest thing to pass (since literally every Republican in Congress is against Obamacare). I don’t think he counted on the far right on being so stubborn (why would you want to repeal nothing instead of repealing something?). There is no way Trump could have completely destroyed Obamacare – doing so would antagonize the moderate Republicans.

  2. We are for the most part apolitical, however, it’s not a good sign that three out of the five major health insurers have already jumped ship. If the remaining health insurers exit the exchange, it will leave many of those in need of healthcare with fewer options. It seems as though both parties may have to learn to work together for a solution.

    • Agreed. But in this politically charged climate, I don’t think there’s any way the 2 parties can work together. It’s been like that since the Obama administration. The left is becoming more left and the right is becoming more right, leaving fewer moderates. Right now, it seems like the Democrats are just going to sit out these 2 years and wait for the election next year.

  3. Two very good points. I think the market will rise for the near future as well, it’s just how much as you mentioned. There seems to be a renewed sense of optimism at the moment & while interest rates remain really low, the market is still the most attractive option to earn passive income.
    The heathcare debacle was a blowback. It would have been nice to get something done even if it was just in small pieces & that boondoggle hopefully won’t get kicked down the road like Social Security & Medicare has.

    • Honestly, I was shocked that Trumpcare didn’t pass the House. That should have been the relatively easy step compared to the Senate.

  4. Not sure if the markets will keep rising in the near future, but that’s why I think it’s important to have a strategy adaptable to market conditions.

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