So much of the market’s expectations for “reflation” in the economy is based upon the premise that a White House and Congress dominated by Republicans could work together to quickly pass legislation. After years of split control between the Executive and the Legislative branches of government that put the brakes on the progress of the country, this bus was expected to start moving again even if it was not the favorite direction of all the passengers. The first taste of action was expected in healthcare policy, in particular the repeal and replacement of the Affordable Care Act (ACA) more commonly referred to as “Obamacare.” This piece of legislation, which just celebrated its seventh year since being signed into law, has been almost universally attacked by Republicans and was considered easy prey since the repeal legislation had already seen a dry rehearsal in 2015. Therefore, this first act was considered a test by the financial markets for how well coordinated the Republicans are thus how much of the policy put forth on the election trail may be possible.
So far, the test has come back negative. After significant cajoling by the House Republican leader and the President himself, scheduled votes were canceled because they did not have the numbers. The financial markets are now starting to price in less confidence in pro-growth policy that, as a consequence, would increase inflationary pressure. We have already seen some weakness in bank stocks, one of the star performers after last year’s election due to the benefits of reflation to their profitability. The consequences will be extrapolated farther. On the campaign trail, there was a broad spectrum of policy initiatives across healthcare, energy, regulation, defense, tax and so on that could only be considered feasible with a perceived consolidation of power into one governing party. Speculation will build on what this means for the President’s budget proposal (which seeks to cut back many programs considered part of the discretionary budget) released last week, and in particular the goal of tax reform which, due to its complexity, was last successful over thirty years ago. With fiscal policy taking the lead, the President’s goal of reaching a higher growth trajectory will hinge on getting his party on the same side.