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Lull in economic, earnings data in week ahead
THANK goodness that's over with!
That could be the sentiment on the stock market this week as the conversation in Washington DC moves past healthcare reform to the much more palatable subject of taxes.
After acting as a drag on stocks for two weeks, President Donald Trump's effort to repeal and replace the Affordable Care Act was abandoned moments before the bell rang at the New York Stock Exchange on Friday.
"It's enough already," said Mr Trump, summing up the decision to drop the legislation in comments to The New York Times.
Early signs that Mr Trump and House Speaker Paul Ryan were unable to herd the cats of Republican congressmen had caused a selloff in "Trump trades". Sectors such as raw materials and industrials that were the biggest gainers in the wake of Mr Trump's election because they stood to gain from his economic proposals, faltered because of fears that the stalled healthcare bill would cause a paralysing traffic jam of legislation.
Since the passage of the 2010 Affordable Care Act, tens of millions of Americans were added to insurance rolls. That act mandated that all Americans acquire healthcare coverage, or pay a fine. The challenge to the Republican party was to convince constituents that they would get a better deal if they gave up this coverage. Members of the House of Representatives Freedom Caucus - the faction formerly known as the Tea Party - were the fiercest opponents to "Obamacare", staking out an ideological position against what they saw as the socialistic aspect of forcing citizens to purchase insurance. These conservatives rebelled against Mr Trump's proposal because it did not roll mandates back far enough.
When Mr Trump made concessions to the conservatives on the Right, however, the long-sleeping moderate wing of the Republican party suddenly awoke to his Left. Their constituents had called, demanding to keep the insurance plans from the Affordable Care Act rather than take the gamble.
Mr Trump confronted the conservative and liberal wings of his party with an ultimatum so dramatic it might have been uttered before the final commercial break in a reality television show: pass this bill or live with Obamacare.
Some analysts say the failure will be interpreted as a sign that the political novices in the Trump administration are ill equipped to usher any of their economic agenda through.
But analysts at brokerage Bank of America Merrill Lynch said that the failure was "not a TARP moment", referring to the crash in stock prices after the first draft of a bank bailout bill was voted down in October 2008.
On the contrary, Quincy Krosby, market strategist at Prudential Financial, predicted that investors will be relieved that Mr Trump is moving on to the issues that spurred the Trump trades in the first place: tax cuts and infrastructure spending.
Much will depend on whether the hardcore fiscal conservatives in the Freedom Caucus now seek to reconcile with Mr Trump or if the rift between Trumpian and old-school Republicans widens into a party schism. In that case, of course, Mr Trump's promises to move swiftly onwards to tax reform could not be fulfilled.
"In our view, the Trump trade was always going to have a 'where's the beef?' moment," said analysts at brokerage Bank of America Merrill Lynch Global Research, in a note to clients. "Hard data recovery and renewed optimism on tax reform (only 10 per cent think passage by August)" could drive cyclical stocks higher in the short term, the analysts predicted.
Ms Krosby, of Prudential Financial, said that the Trump trades may have stalled for a reason unrelated to the healthcare debate. While surveys show an improved mood in consumer and businesses - one recent consumer-confidence survey registered its highest reading in more than a decade - readings of economic activity have not followed suit, Ms Krosby said.
Last week, the Institute for Supply Management's survey of the services sector, the most important driver of economic growth, was at its weakest since before the presidential election.
This week sees a lull in economic and earnings data - the only major statistic is a revision of gross domestic product growth. Any hints on earnings ahead of quarter end on Friday are likely to be negative . . . the week before official earnings reports is known as "warnings season".
For the bulls, the best hope is that the Republicans in Washington make a convincing argument that, after the healthcare debacle, they have a credible plan to pass corporate and consumer tax cuts.
"If they were to suddenly focus on tax reform, perhaps then they will start to see confidence as outlined by CEOs and consumers start to manifest itself in the hard data," said Ms Krosby.
Mr Trump's legislative stumble was also the first major stumble for stock markets since his election. But Mr Trump's public eagerness to move on from healthcare and take up market-friendly topics suggest that a man who fanatically follows polls and ratings may view the stock market as the ultimate measure of his progress.
For stock investors, at least, that could be a good thing.