Tax-Cut Failure Could Tank the Market

AS the stock market hits record after record under President Trump — the Dow crossed the 23,000 mark this week — it’s important to recognize the way Washington can screw it up: failing to cut taxes.

The simple act of lowering America’s absurdly high corporate-tax rate — currently at 35 percent — to around 20 percent, which puts us in line with the rest of the world, plus lowering a host of other business and individual taxes, has increasingly become a make-or-break moment for investors.

More important: The market has been able to handle the continued delay in promised tax cuts just fine, but if tax reform bellyflops the way Obama Care-repeal did, many smart analysts are coming to the conclusion the market will turn sour.

Without tax cuts, one Wall Street executive told me, “the markets will drop like a rock.”

Treasury Secretary Steve Mnuchin said as much in an interview the other day when he noted the market’s 25 percent plus rise since Trump’s election is in part due to “reasonably high expectations” of major tax cuts as outlined by the president. Mnuchin might be talking his book, but I spoke to some big in- vestors, and they increasingly agree.

This is a significant change in investor attitudes. Since Trump’s surprise victory in November, stocks have soared despite the gridlock in DC. Of course, many on the left (and in business media) have argued that the credit for the continued market rally goes to former President Barack Obama, who left Trump with a growing, stable economy.

Baloney. The Obama economy grew an average of less than 2 percent a year, which is dismal by historic standards, in large part because there wasn’t a business-stifling regulation he didn’t like or a tax he didn’t want to impose.

True, stocks soared under his watch, but remember he took over during the depths of the financial crisis and when the Federal Reserve began slashing interest rates, thus inflating the Dow and other averages.

Scratch the surface of the seemingly strong headline economic numbers under Obama, like the low unemployment rate, and you’ll see that under-employment is still very high and wage growth stinks.

Investors knew this; many believed a Hil- lary Clinton victory would’ve precipitated a market correction because the Fed easing had run its course and she promised more Obamanomics. But the election of Trump avoided that trap, and the “Trump bump,” as it’s known on Wall Street, has been a factor in the continued post-election stock rally.

Investors told me that, initially, tax cuts weren’t a factor in the stock bump: Instead, it was mostly due to the optimism fostered by Trump’s plan to reverse Obama’s regulatory agenda through executive actions. And, of course, anything was better for the economy and stocks than the warmed-over socialism of Obama and Clinton.

But keep in mind, as much as stock values represent economic and corporate fundamentals, they also represent raw emotion known as the “herd mentality.” And that mentality, according to the investors I speak to, has begun to shift in recent weeks.

The same investors who took the glasshalf-full approach to the market now foresee the market boost running out of gas without the promised tax cuts. True, stocks are soaring, but you hear the word “over-valued” more and more, meaning an economic jolt — like tax cuts — is needed to prevent a sharp correction.

GDP growth has improved on Trump’s watch, but not enough to sustain stocks for the long term unless the economy gets some help. On top of that, investors worry about the Fed now raising interest rates to offset the money-printing of the Obama years. Higher interest rates usually slow down the economy, making a stimulus even more important.

Of course, even with the type of tax cuts outlined by the president, the markets will eventually sell off — they always do. But they always bounce back for the simple reason that markets reflect business fundamentals, and higher corporate earnings brought on by tax cuts have proved to be among the best ways to strengthen those fundamentals.

In other words, the market mentality that once said anything is better for the markets than Hillary is now saying to the president and Congress: Deliver on those promised tax cuts or face the consequences. And they won’t be pretty.