Some Common Cents for March 27th, 2017

This week, you might think investors are agonizing over the particulars of the proposed healthcare legislation. Some might be; however, I would argue the details aren’t as important as the Administration’s ability to get legislation through the Congress. After all, the markets assume President Trump has a pretty aggressive pro-growth agenda, and this is the first major test of his actual political clout in Washington.

If this fails, what will happen when the tax reform proposals hit Capitol Hill? That is what really interests investors, and for good reason.

At this time,  it is difficult to imagine a sudden surge in corporate earnings, at least one which would engender another significant ‘leg up’ in the stock market. Sure, increased business owner and consumer sentiment might drive an increase in economic activity. However, I would counter with much of that increase in sentiment has to do with the prospect for meaningful tax reform. If it doesn’t happen, or is so watered down in the sausage making, it could be a more tricky year than it would currently seem.

The reason is simple: economic conditions suggest the need for a higher overnight lending target. Put another way, historically, the overnight rate would not be as low as it has been, and currently is, given the overall level of economic activity and expectations for inflation. On the flipside of the coin, in a simpler time, the Fed probably wouldn’t be ‘raising interest rates’ given, again, the current overall level of economic activity and expectations for inflation.

The Fed apparently believes conditions are strong enough to warrant a more ‘normalized’ interest rate environment, and is behaving accordingly. Obviously, this will raise borrowers’ debt service on floating rate obligations, both individual and corporate. Without a corresponding increase in revenue, this will have a compressing effect on earnings. Period. …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.