Why Trump’s Much-Awaited Tax Plan Announcement Could Be a ‘Sell the News’ Event
Investors who buy stocks now in anticipation of the announcement of President Donald Trump's tax plan are making a big mistake, say some market strategists.
Two weeks ago, Trump said that he would unveil a "phenomenal" tax plan in the next few weeks, which drew the attention of markets despite the lack of further details. More generally, the rise in stocks since Trump's election has partially been pinned on his announced plan to lower the federal corporate tax rate from 35 percent to 15 percent.
The problem, as Cowen & Co. head of equity sales trading David Seaburg put it, is that "we're pricing in and paying for a lot here" due to investors' "wickedly high expectations for just the tone of [Trump's] voice."
As a result, "I think that we've just boxed ourselves into a corner here," Seaburg said Friday on CNBC's "Trading Nation."
Doing a little back-of-the-envelope math, Seaburg said that about $1.30 is added to total annual S&P 500 earnings for every percentage point that taxes are cut. Even if the tax rate falls as low as 25 percent, which would be a 10 percent drop, then only $13 would be added to S&P earnings, bringing total 2017 earnings up to about $145.
"Given a realistic multiple of 17, we have a little more upside, or we're right around that level in the S&P right now … so I wouldn't be chasing the tape," Seaburg said.
According to the trader, expectations around the tax plan announcement have become so heightened that "I think the market comes in when the announcement's made," making the long-awaited tax plan unveiling "a sell-the-news event" (playing off of the trading chestnut "buy the rumor, sell the news").
Max Wolff, market strategist with 55 Capital, is even more pessimistic.
"I think there's a lot of upside in the market that doesn't make much sense," he said Friday on "Trading Nation." "When you have a fantasy, you don't worry about the thorns on the rose, because there aren't any."
Indeed, the tax cut plan is predicated on a tax on imported goods, which would hurt corporate earnings, and potentially have negative ramifications on U.S. trade.
However, there appears to be much disagreement between the White House and the Republican-controlled Congress on the plan. On Monday, the AP reported that when it comes to tax policy, "Republicans have a potentially more vexing impasse" than on the also-fraught issue of an Affordable Care Act rollback.
Courtesy of CNBC