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Investors have had no shortage of political news to digest in recent days, as the unclear results of the Democratic Iowa caucuses and the impeachment trial in the U.S. Senate helped guide stock-market sentiment this week.
President Donald Trump’s third State of the Union address, scheduled to begin Tuesday night at 9 p.m. Eastern Time, could also be of great interest to investors, as reports indicated he may push for new efforts to lower prescription drug prices, address trade policy and propose new tax cuts.
Read: How the stock market has reacted to State of the Union speeches
White House economic adviser Larry Kudlow said Tuesday morning that the administration is considering a new tax-cut proposal. “There will be, at some point during the campaign, a future looking tax cut 2.0,” he said in an interview with Fox Business Network. “We hope it will be a middle-class tax cut,” he added. “Perhaps a 10% tax cut for middle-income individuals.”
Keith Buchanan, portfolio manager at Globalt, said that investors will be tracking such proposals, and should be prepared for the market to react in the coming days. “I think that any new indications of a further tax cut could cause more optimism,” he told MarketWatch. “The market hasn’t shown much concern over the pay-fors associated with those, so it would be positively received.”
The Congressional Budget Office last week projected a federal budget deficit of greater than $1 trillion in 2020, with the gap exacerbated by rising Social Security and Medicare costs and the 2017 corporate tax cut, which was not offset by cuts in spending.
Markets have cheered the impact of the tax cut on corporate profits and not showed concern over an accelerating rise in public debt. Since the beginning of 2017, the Dow Jones Industrial DJIA, +1.70% as gained 46.2%, the S&P 500 index SPX, +1.71% has advanced 45.1% and the Nasdaq Composite Index COMP, +2.04% has rallied 75.8%. Meanwhile, the interest the government pays on 10-year debt TMUBMUSD10Y, +4.81% has actually fallen from around 2.4% in January of 2017 to 1.6% today.
Buchanan said investors will also be on the lookout for any comments on trade policy, now that a revised North American Free Trade Agreement has been approved by Congress and the White House (though Canada has yet to ratify it), and U.S.-China trade tensions have eased after the agreement to a phase-one trade deal.
He said he expects the president to “take a victory lap” on these agreements, but warned that there’s a chance the president announces new measures aimed at trade partners. “Any talk of additional tariffs could surprise the market, and that would dampen the optimism of the past couple days,” he said.
On the sector level, health care stocks will be important to watch, given the possibility that Trump unveils new policy proposals aimed at lowering the cost of prescription drugs. “Trump will likely use his State of the Union address to tout his administration’s efforts to lower health care and prescription drug prices, but will also likely call on Congress to do more,” wrote Stephen Pavlick, Washington policy analyst at Renaissance Macro research, in a Tuesday note to clients.
One proposal he may highlight is an international pricing index, or IPI, which would tie drug prices paid by Medicare to prices paid abroad, which are generally lower than those paid by Americans.
Health care stocks have been lagging the market of late, due in part to perceived risks related to public policy changes. The SPDR Health Care Select Sector ETF XLV, +1.95% has gained 12.7% over the past year, versus as 21.3% rise for the S&P 500.
Other sectors seen to face policy risk include the financial sector XLF, +1.89% and the energy sector XLE, +0.91%, and any mention of further deregulation efforts could be a boon to those sectors.
