Traders don't want to get burned again by Trump's tax reform promises
- Trader positioning ahead of the Republican tax-plan unveiling doesn't suggest much confidence in the measures becoming law.
- It's possible that investors are simply waiting to see signs of progress before buying the stocks of companies seen as potentially benefiting the most.
The details of President Donald Trump's tax plan are expected this week. This is the full-blown plan, being released by the House, and its release will mark Republicans' biggest step so far toward meaningful action on taxes.
Even before the news broke Tuesday night that the plan's rollout would be delayed by a day to Thursday, stock traders were skeptical. It's easy to see why: Investors betting on big changes in the corporate tax code — by buying shares of companies expected to benefit the most — have been burned on this before. So rather than bid up the likely winners, they're in wait-and-see mode.
That's a change from past behavior. Most notably, in the months immediately after the presidential election, investors piled into the stocks of the nation's most highly taxed companies. They did it again, though with a little less enthusiasm, in June and September, as the tax plan took priority over a healthcare overhaul.
You can see all those bumps in the chart, which shows the performance of an index of stocks tracking highly taxed companies, relative to the S&P 500. It's intended to serve as a proxy for the market's confidence in the proposed policies. The most taxed group should get the biggest boost from a tax cut.
And as you can see, it's now at a postelection low.
Of course, this is just one measure. There are other ways to bet on a change to the tax code. For example, rather than focus on the highest-taxed companies, an investor can zero in on one specific sector and then make options bets on an exchange-traded fund that tracks it. If implemented correctly, this type of positioning could limit the risk of disappointment or position a trader to profit from upside moves.
If the low level of trader confidence persists, two factors will likely be to blame. One is the sudden appearance of opposition from homebuilders, who are fighting to defend tax provisions that encourage people to buy houses. As my colleague Bob Bryan explained, this is a clue to kinds of individual battles the administration will face as it tries to sell the plan.
Also, Bloomberg News reported this week that lawmakers were considering phasing in the corporate tax cuts, as they grapple with the impact of the plan on deficits.
The specifics of this are still up in the air. Traders, it seems, aren't taking chances anymore. Read » | | | |
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