Tax Reform Pushes Stocks Higher
The stock market had a huge day on Tuesday as the Dow had its 61st record high of 2017. The Dow was up 1.09% and the Russell 2000 was up 1.53%. The S&P 500 was up 0.98%. It has been above its 200-day moving average for 358 days which is the 4th longest streak since 1957. The 2nd and 3rd longest streaks were 385 days, meaning a Santa Clause rally could help make this the best rally since the 475-day streak from 2012 to 2014. To get an idea how far volatility has fallen, the chart below shows a 6-month rolling window of days where the VIX was below 10. As you can see, there has been over 40 days with the VIX below 10, while in the 1990s bull market the total peaked at 6 days.
The reason this was such a great day was optimism about the possibility of the GOP passing tax reform. The two Senators who stated they might oppose the bill, Corker and Johnson, voted to advance it, increasing the odds it will pass. The chance of an individual tax cut being passed this year is at 38% on the PredictIt betting website. The chance of a corporate tax cut passing increased by 18% on Tuesday to 58%. This is the first day the odds were above 50%. The two Senators’ support for the bill allowed it to be advanced by the Budget Committee in a vote of 12-11.
This procedural vote means the plan might be voted on as early as this week. If it passes the Senate, the House and the Senate will need to come together to reconcile their differences. The chart below shows the process the tax bill needs to go through to be passed. The next key day will be the full Senate vote which might be Thursday. This will be the biggest test this bill has needed to face so far. If it’s successful, I expect the odds to get close to 75% for a corporate tax cut by the end of the year. This is great for stocks which are now up 17.34% for the year. Along with the tax cut, some money managers are playing catch up, trying to window dress their portfolios by buying the winners of the year to make it look like they were smart. This could help push the S&P 500 to close up 20% for the year.
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