Stocks can continue to rise this year this year, but “significant” new highs are off the table, due to the controversy swirling around the Trump administration, says Bob Doll, chief equity strategist at Nuveen Asset Management.
Doll said the stock market’s gains this year have mostly been about strong earnings gains and the economy, but there was a chance of the market getting an added lift form the type of tax reform package and fiscal policy being discussed by Republicans. Now, it seems that if there is reform, it will be a watered down, and perhaps just a corporate tax cut as opposed to a sweeping grand plan to change the structure for individuals and corporations.
This definitely takes away the chance of “significant new highs, which were possible with phenomenal earnings we were seeing. Unless earnings are going to decline, I don’t think we have big downside,” he said. Doll said he had been expecting a 2018 tax plan all along, but many in the market were looking for a plan by this year.
“I think we’ve taken some of the upside away. but the probability of [a tax plan] in the last 48 hours has gone down,” he said in a telephone interview Thursday. He also appeared on “Squawk on the Street.”
“If I had a choice of tax reform or good earnings, I’d take good earnings…Tax reform is icing on the cake, but it’s not the cake.”
News reports that President Donald Trump asked former FBI director James Comey to end his investigation into former national security advisor Michael Flynn raised the prospects of legal issues for the president, and that concerned the stock market. Trump last week fired Comey, who was investigating the Trump campaign’s ties to Russia. The Justice Department Wednesday appointed a special counsel to investigate Russian influence in the election. Flynn has been at the heart of the investigation into the Trump campaign.
Doll said the market could continue its pullback. “The volatility has been very low and pullbacks have been very slight, so when you get a 2 percent pullback form an all-time high, people think there’s a financial crisis somewhere,” he said. “I’d be shocked if we turned around and [right] went back up to new highs. I think it’s going to be sloppy for a while.”
Doll said the market normally has a 10 percent correction every 14 months and an average of three, 5 percent declines each year. “We’re due at any point for a fiver. We’re almost half way there in one day.”
Even with a near 2 percent decline Wednesday, the S&P 500 is still up 10.5 percent since the election. Some of those gains were from the same expectations for pro-growth policies that also pushed business and consumer confidence indicators higher. Stocks started off weaker Thursday but were trading higher at mid-day.
“If somebody from on-high made an announcement that there’s no tax reform and no tax cut coming, the market is going to have downside,” Doll said. “I don’t think there’s much in the market from pro-growth policy anymore. That sort of came out of the market, as the politics, then the noise… has accumulated. I don’t meet many people who think they’re going to get anything big and if we get it next year, it’s going to be smaller.”
The strategist said he would not rule out that the Republican-controlled Congress will still make an effort to push through a plan, especially since there are mid-term elections next year and they may feel motivated to have a legislative win to protect their control of the House.
“Don’t watch the president when it comes to tax reform, watch the Congress. The question is can the Congressional Republicans cobble something together, and I think they can,” Doll said.
The lack of sweeping tax reform is not going to break the market, but a big tax and fiscal plan could have given it a boost. “I think it’s a minor story for the markets… If you paid attention only to Washington DC, you’d say why is the market not significantly lower than it is now. If you paid attention to earnings, you’d say why isn’t the market higher than it is now,” he said.
House Speaker Paul Ryan said Thursday that he is still hoping to see tax reform in 2017, and the House is looking for alternatives to the controversial border adjustment tax included in the House bill. Earlier Thursday, House Ways and Means Committee Chairman Kevin Brady said the House has common ground with Trump on tax reform, and Trump is not opposed to a revenue neutral plan. However, Trump’s own plan is not revenue neutral.
For now, the controversy around Trump should not really impact the market , except in that it is expected to distract lawmakers from moving ahead on legislation.
“It only matters if the Republicans can’t get some progress made. It matters if the thing deteriorates., if the special counsel finds stuff. Then it’s going to reverberate and there will be ore issues. Today’s, it’s the story at the top of page one. Next week , it will be at the bottom of page 1 and then it will go to the inside pages,” he said.
Watch: Doll says still room to upside if Trump agenda moves forward