U.S. stocks were mixed last week, with the S&P 500 Index largely unchanged. Behind the headline numbers, however, there was some movement within and between sectors. Health care stocks sold off sharply last week, with managed care stocks hit particularly hard by regulatory concerns. The CEO of United Healthcare came out strongly against the “Medicare for all” plans being discussed by Democratic presidential candidates, which called the issue into focus. In contrast, both technology and financials outperformed for the week.
Just in case you missed it, the much awaited Mueller report was released last week and it has legally strengthened the president but has politically given the Democrats a roadmap to use against the president in his re-election. With every Democrat calling for higher taxes, and most notably changes to the corporate tax rate, companies will need to decide if they want to pull forward their investment to take advantage of the current tax code ahead of the 2020 election. In particular, the 100 percent expensing requires companies to have their investments placed in service to qualify for the tax benefit. With the election 18 months away, companies might look to pull forward their investments to ensure they can benefit from these tax changes. This is not new. In 2011, President Obama had 100 percent expensing for one year and that year was the second largest year of S&P 500 capex on record ahead of the 2012 election. We would not be surprised if we see this in the areas of capex and mergers as we head into the second half of 2019.
- Betting odds for the presidential election have barely moved since the release of the Mueller report and it looks to be a tight race
- After-tax, after-inflation income growth is the key for a president to be re-elected. Oil prices are a key variable in this income category which is relevant based on today’s Iran waiver decision.
- If the Atlanta Fed GDP tracker is correct for 1Q GDP, this week’s GDP report could show similarities to GDP following the 2003 tax cut – an acceleration for two quarters, a soft quarter to follow, and then a reacceleration of growth.
- Budget deficit is at a turning point. April tax revenues are up 12 percent midway through the month. The past three months of tax revenue are up 10 percent over the previous three months. The acceleration of tax revenues is not happening because tax refunds are meaningfully lower but more because of the pick-up in the economy.
- Report on the economic impact of a revised NAFTA agreement is better than expected but the pathway to ratification remains slim.
- Biden is to enter the presidential race this week. We expect him to focus on income inequality, infrastructure, and a defense of the Affordable Care Act. If Biden gains traction, he could alleviate some of the building concerns in healthcare.
Source: Thomson Eikon
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