S&P-500 (SPX FUT): 2325-2350 May Be A Big Hurdle Despite Trump’s Promise For A “Phenomenal” Tax Plan; Overall Structure Of “Trumponomics” And Its Timely Passage & Implementation May Be Vital; A Stronger USD May Not Be Good For US Economy & US Corporates Also

Trading Idea: 11/02/2017 (19:00)

SPX-500: 2313 (LTP)

Sell on rise around 2320-2330 OR 2350-2360

TGT: 2290-2260*-2230-2215* & 2180*-2150 (1-3M)

TSL> 2336 OR > 2366

Note: Sustaining above 2336, SPX-500 may further move towards 2350 area, which should again offer a good positional resistance and only consecutive closing above 2366 area for any reason, whatsoever, it may further rally for 2385-2405-2425* & 2450*-2500-2550 in the near to long term.

Anyone, having long position in SPX-500 or planning to enter fresh long, may also watch 2290-2260 area as nearest positional support.

After some days of consolidation following “Trumpfatigue”, SPX-500 broke the earlier resistance of 2285-2305 zone and trading at fresh life time high amid Trump’s promise of a “Phenomenal Tax” planning in the next few weeks. Although the probable tax cut is a known factor for the market as it was already in the election rhetoric of Trump, the fact that ex-Goldman CEO (Cohn), being a part of the financial industry is formulating the same and negotiating with other members of US Congress, who have their own version of tax cuts (Ryan & McConnell), market may be assuming that it will be a pro-business (financial industry friendly) tax cut plan.

Trump’s plan of tax cut may be involved with both corporate & personal and may also be focused with on cuts on comparatively lower earnings/turnover (like Indian Govt’s FY-18 budget proposal regarding tax cuts for small business/SMES & low bracket individual earners, leaving the big corporates tax rate unchanged !!).

Most probably Trump & Ryan will settle for 20-25% corporate tax from the present rate of 39.1% (35% federal tax + 4.1% combined state tax) against earlier perception of 15%. Again, if this cut is intended only for small business (SMES), then it may not going to help the big corporates (SPX-500 earnings) in a meaningful way and moreover, passage & implementation of the same may be vital; unless US congress has details of Trump’s huge fiscal/infra spending plan ($100 bln/year for 10 years totaling $1 trln?) and modalities of funding of it (fiscal deficit). As par various US political experts, it may take another year for Trump to sign it into law because of realities of US congressional budget process & politics.

Trump’s original tax cut plan of 15% & incremental fiscal spending may add US Govt debt around $7-12 trln over ten years, which is now around $20 trln (at 20k Dow !!). Ryan has also some tax plan with 20% corporate rate & some border tax adjustment. As par present US Congress & senate political realities, Trump has to take help from the DNC for passage of his tax plan by consensus and not by simple voting. By providing some tax cuts to US corporates/SMES and low earning people/middle class, Trump is also trying to slash “Obamacare” in a balancing act and DNC is dead against it. Thus, the whole concept of “Trumponomics” (incrementally higher fiscal/infra spending, tax cuts) may be subjected to congressional approval and it may not be so easy and may also take considerable time period for actual passage & implementation, which may happen only in 2018.

Another proposal of Trump to put border (import) tax of 20% may be also not good for US as it’s primarily an import oriented economy and may also be bad for US corporate earnings; imported RM cost may be ballooned and other countries may also impose such import tax for goods coming from USA. 

Perception of “Trumpflation” may be the primary reason for strong USD/US bond yields after “Trumpism” apart from dumping (forced selling) of USTSY bonds to defend their currency against USD from PBOC and some other countries/investors; but ultimately a strong USD and incrementally higher borrowing costs may not be good for US economy also. Lately, Trump & Co may have realized this fact and are now trying to talk down the currency (USD). But it’s also a fact that China, Japan, EU, Saudi Arabia are some of the countries, which have large positive trade deficits with US have also significant holdings of USTSY and that may be one of the primary reasons for the lower US borrowing costs and it’s also a funding source of US fiscal deficit; otherwise who is going to fund US fiscal deficit and expected huge fiscal/infra spending of Trump (Govt capex)?

Thus, going forward, Trump can’t afford to talk down the USD much and a currency war with its trade partners may not be good for US also. So, it may be a double whammy for Trump and his plan of “Trumponomics” has to be seen in details; mere jawboning is not enough; eventually fiscal deficit/GDP or debt/GDP (i.e. fiscal prudence) may be vital for any economy, including US, despite talks of fiscal /structural stimulus.

SPX-500 rallied by over 14% since 9^th Nov’16 ( from Trump victory day low) and moreover by around 28% from early March’16 low following Dec’15 Fed hike and subsequent global market turmoil amid China jitters and capitulation in oil. Since then, thanks to coordinated central bank’s intervention (?) after G-20 meeting in China (NIRP by BOJ, ZIRP by ECB), OPEC intervention & consistent jawboning about oil, Brexit and Trumpism are all caused a roller coaster drive for the market. Eventually, it was central banks (Fed/ECB/BOJ/PBOC), who has controlled the market and prevent it from ultimate capitulation. Now, after Trump and his brand of nationalistic politics, market is being more influenced by the politicians than the central bankers, be it US or EU. 

Going by various recent Trump Tantrums and immigration, trade protection issues, there is significant US political risks despite Trump apparently changed his recent attitude towards China & Japan. Trump’s recent spate of clashes with various US judges regarding the immigration ban issues may have forced US into some types of constitutional crisis; but Trump has recently changed his “strategy” and he may not challenge the lower court verdict in the Supreme Court. 

Market is making a relief rally as Trump is gradually trying to change his initial trade protectionist and out of establishment image to a more matured politician & trade negotiator. Earlier, Trump may be trying to run America with his business empire style, where his “executive order” is the last word and no one should question it. Gradually, Trump & Co may be realizing that, it’s not the right way to run a country like America and they have to work within the “system”; otherwise Trump & his version of America will be soon left alone in this age of globalization.

Trump may be also trying to run US with his corporate style, where most of the key policy makers/secretaries are from the corporate world and thus a clash between traditional politicians/insiders with Trump & Co may also be inevitable (political reality in a democracy).

All these may ensure delayed passage & implementation of “Trumponomics” and its effect on US GDP & corporate earnings, if any. In the meantime, a stronger USD, higher borrowing costs for US economy and tepid GDP growth may cause a situation like “stagflation” instead of “Trumpflation” (higher US growth, better corporate earnings, and higher inflation).

Although, the present US market rally may be supported by better corporate earnings & US economic data, wage growth is still tepid. As on Q3FY16, actual SPX EPS was 88.36 and projected Q4FY16/FY-16 EPS is around 117.56 (YOY: 88.43). If final FY-16 EPS indeed come around 118 (+33%) then at 2315, SPX-500 PE may be around 19.62, which is fair to its long term average of 16. 

But projected FY-17 & FY-18 EPS of around 134 (+12%) & 148 (+10%) may be on the higher side, considering decreasing easy money policy by Fed & other central bankers (less buy back of shares), saturation of oil at current $50-55 range (no incremental benefit of higher EPS for energy related shares), probable higher costs & lower earnings for Pharma & tech companies as a result of Trump’s “America First” policy, stronger USD, significant EU political risks, China jitters despite perception of “Trumponomics” and recent spate of globally higher PMI(s). Over the last few years after 2008 economic recession, average EPS CAGR for SPX-500 may be around (-) 16% (i.e. negative growth).

For an economy, where GDP is growing around 3%, it may also be very tough for the average US earnings (EBITDA) & EPS to grow double digit on a consistent basis above 12-15%; i.e. 4-5 times of GDP growth. Top line (operating revenue) of US corporates may not be growing as expected (around 40% beat so far in Q4FY16) and the beat in EPS (AROUND 65% beat so far in Q4FY16) may be coming on the back of buy backs of shares & other non-operating income and tax benefits.

The only respite may come from Yellen next week, if she preferred to be less hawkish considering overall mixed US economic data & tepid trend of wage inflation amid uncertainties about “Trumponomics”.

Considering Trump’s recent jawboning attempt to talk down the USD and uncertain trajectory of “Trumponomics”, Fed may eventually prefer to be in the sideline in Jun’17 also and may only hike once in Dec’17, contrary to earlier dot plots of 2-3 hikes in 2017. Trump may even try to sign an “executive order” to devalue USD against other G-10 currencies (on a lighter note!!)

Ultimately, a stronger USD may be both bad for US as well as global economy, especially for EM and a dovish Fed in 2017 along with Trump’s effort to talk down the USD may be one of the green shoots; although in that scenario, “Trumpflation” trade may also see a knee jerk reaction.

Technically, whatever be the narratives, SPX-500 has to sustain over 2325-2350 area for further rally towards 2425-2450 zone; otherwise it will come down towards 2280-2115 territory again in the coming days.