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Analyst: Tax Worries, Not Trump’s Travel Ban, Are The Real Reason Why Stocks Are Falling

From Brad Hoppmann: Less than one week ago, the Dow hit the milestone 20,000 mark for the first time … and many in the market were feeling pretty good.

Monday, stocks fell below that 20K mark. At one point, the Dow was down about 158 points. And based on the jump in the so-called “fear gauge,” or the VIX (up 12.3% in Monday trade), you get the sense that the market isn’t feeling so good.

Of course, the market is responding to news stemming chiefly from, and otherwise related to, President Donald Trump and the Republican government’s policy proposals.

Over the weekend, we saw the confusion, outrage and protests over the president’s executive order to restrict immigration from seven predominantly Muslim countries.

Curiously absent in that list were many of the countries (Saudi Arabia, United Arab Emirates, Egypt) that have been the most-fertile sources of jihadist terrorism.

This travel policy is dominating the news cycle, and even many high-profile Wall Street executives have come out against it.

Goldman Sachs (GS) CEO Lloyd Blankfein told his employees that the immigration policy causes “disruption to the firm, and especially to some of our people and their families.”

Yet this immigration policy kerfuffle is not the chief reason why stocks are selling off today.

There’s a much bigger reason, and it’s all about tax reform.

If you think about what’s been driving the equity markets since Election Day, it doesn’t have much to do with immigration reform and travel bans.

It doesn’t have much to do with building a big wall along the nation’s southern border, either.

Note the spikes in the Volatility Index just before the Brexit vote and the U.S. election.

The rally has fed somewhat off the anti-regulatory climate. But even the latest regulation-slashing executive orders that President Trump signed aren’t the reason why the “animal spirits” have been doing a bullish dance on the corner of Wall and Broad.

The main reason why stocks have gone up since Mr. Trump’s surprise victory is the prospect of a pro-growth agenda being implemented by the administration and a Republican majority in Congress.

This prospect is why stocks are trading at high valuations, and it’s why we’ve seen such a sharp surge in the Dow, S&P 500 and particularly the “growth” indices such as the Nasdaq Composite and Russell 2000 (IWM).

Small caps are up 9.5% since the election.

Key to the implementation of a pro-growth agenda is tax cuts. In particular, a significant corporate tax cut that would take the current rate of 35% down to 20% or even 15%.

Yet on that front, the Washington wheels seem to have ground to a very slow crawl.

Last week’s gathering of Republican congressional leaders in Philadelphia wasn’t very comforting for Wall Street bulls hoping for corporate tax relief.

In fact, a recent Reuters article described the meeting in the following way with respect to that tax issue:

When it comes to tax reform, senior congressional aides said the spring of 2018 might be a more-likely time than this year for the passage of legislation.

That’s a big “ouch” for traders hoping to see a lot faster progress/implementation of corporate tax reform than sometime next year.

And I think that is a much bigger reason for today’s sell-off in markets than the policy kerfuffle over immigration.

Still, the travel ban issue serves to amplify one of the biggest concerns facing markets today. That is, President Trump’s willingness to power forth and implement much of the agenda he promised he would during the campaign.

Big, controversial policy proposals such as the travel ban have got Wall Street understandably nervous. And the sense of unease and uncertainty about what could come next is palpable.

This is particularly true on trade, as much of Wall Street is fearful that the president will launch some kind of trade war with China and/or Mexico.

The bottom line here is that the further President Trump and the Republican Congress move away from implementing pro-growth policies such as Obamacare repeal/replace, infrastructure spending and corporate tax reform, the more Wall Street is going to worry.

And the more Wall Street worries, the more stocks will struggle.

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) was unchanged in premarket trading Tuesday. Year-to-date, DIA has gained 0.95%, versus a 1.80% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #6 of 77 ETFs in the Large Cap Value ETFs category.

This article is brought to you courtesy of Uncommon Wisdom Daily.

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