In a Dec. 16 Twitter post, the Nobel laureate economist and New York Times columnist Paul Krugman asked, “What does the market think about the economic impact of this tax bill?” He concluded by noting that “markets look extremely unimpressed.”

We had some sympathy for this view, noting that corporate earnings and a strong economy both in the U.S. and abroad were the primary reasons for the stock market rise. More recently, however, sentiment appears to have changed. Although earnings and the economy remain the primary driver for equities, events in Washington now appear to be more of a tailwind for markets.

Still, in dismissing the stock market, Krugman argues that “there is one market price that tells us something: the value of the dollar.” But in analyzing how the markets feel about the tax bill, it is probably worth looking at stocks. The correlation coefficient between the year-over-year percent change in the S&P 500 and real gross domestic product growth is 0.50. The correlation between GDP and the broad dollar index is zero. Given the dollar’s role as a haven asset, it is more likely to rise during times of economic stress, not growth. Therefore, it is reasonable to view stock markets as a growth momentum barometer.

As for the contention that the value of the dollar ought to rise, that’s true, but only on a stand-alone basis. Exchange rates move for a variety of reasons: growth in the U.S., growth outside, and policy inside and outside the U.S. For example, monetary policy can ease overseas, pushing the dollar exchange rate higher. This year, the greenback has sold off largely as a consequence of stronger growth overseas. Europe, Canada, Japan and many emerging-market economies have seen sharp upward revisions to growth. During this time, U.S. growth expectations have been stable. Not surprisingly, those currencies have been some of the best performers against the dollar.

Now, let’s take a more systematic examination of how stocks have responded to news from Washington in recent weeks. We looked at Bloomberg News market wrap headlines at the close of each trading day. Analysis like this assumes markets are efficient with new information priced in upon announcement. The chart below shows the cumulative change in the S&P 500 on days of some Washington-centric event. The federal government was a tailwind early in the year, then a headwind in the middle of the year, and is closing the year as a tailwind.

Specifically, stocks sold off earlier in the year during the Republicans’ failure to repeal the Affordable Care Act. Stocks sold off after the President’s CEO councils disbanded after Donald Trump’s widely criticized response to events in Charlottesville, Va. Each of these events likely cast doubt over the prospect for tax reform. After all, if the president couldn’t get along with CEOs who would help him muster public support for business tax reform?

Recently, however, stocks rallied when House Republicans unveiled their plan. They rose when the Senate Budget Committee advanced the bill to the Senate floor. They surged with the announcement that Republican Senator John McCain, a key swing voter, would support the legislation. Finally, stocks continued climbing as the bill, which was signed into law on Dec. 22, made its way out of conference committee.

We can’t say whether all of the good news from the legislation is priced into equities, and the market could be wrong about how much earnings will rise next year. But, it is fair to say that the stock market has a favorable view of this legislation, and given the stock market’s relationship to broader economic growth, stocks are discounting stronger growth next year.

What about Krugman’s contention that “if advocates were right to insist that the benefits of tax cuts will be passed on to workers, stocks wouldn’t rise at all?” This is not necessarily true. There is a big difference between a margin slowdown caused by higher wage growth and a margin slowdown caused by slower productivity growth. In the first scenario, income shifts from firms to workers. That helps household spending by providing firms with a partial top-line offset to the hit to the bottom line. Margins compress but profits can keep rising. The second scenario is bad for stocks because there is no top-line offset. And remember that equities are correlated with GDP growth. Today, we appear to have some combination of stronger wage growth and productivity. That’s not a bad backdrop for equities.

In short, if the question is how markets feel about the tax legislation, a first-pass answer is positive.

Neil Dutta is the head of economics at Renaissance Macro Research, responsible for analyzing global trends and cross-market investment themes. Reader may email him at ndutta2@bloomberg.net.

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