Mnuchin warns of ‘significant’ stock market drop if tax reform fails

Treasury Secretary Steven T. Mnuchin said that failure to pass the Republican tax overhaul would trigger a “significant” drop in the stock market, which has rallied to record highs in recent months.

His warning, which some market analysts disputed, came as a new poll showed 52% of Americans oppose the tax plan, which is centered on huge cuts for corporations.

Only a third of respondents in the CNN poll said they supported the proposal from the Trump administration and congressional Republican leaders, which lawmakers are scrambling to turn into legislation.

With Congress facing a difficult task in passing a tax bill by the end of the year, Mnuchin increased the stakes by saying the recent stock market rally would end if the effort fails.

"'There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done,” Mnuchin told Politico in a podcast interview that aired Tuesday.

“I think to the extent we get the tax deal done, the stock market will go up higher,” he said. “But there's no question in my mind that if we don't get it done you're going to see a reversal of a significant amount of these gains.”

President Trump has repeatedly touted the stock market gains since his election last fall. The Dow Jones industrial average is up about 27% and the Standard & Poor’s 500 index is up about 20%.

Greg Valliere, chief global strategist at Horizon Investments, agreed that investors have priced in passage of tax legislation, though it doesn’t have to come by the end of the year.

“The market is counting on a tax cut….so if it suddenly looked like the tax bill was dead, I think it would be a significant negative for the market,” he said. “I’d say there would be a significant sell-off.”

The chief U.S. equity strategist for Goldman Sachs Group Inc. said last week that he believed the stock market is overvalued unless a tax overhaul is enacted.

But John Lonski, chief economist at Moody's Capital Markets Research Group, said he thought the stock market could handle the failure of the Republicans’ tax cut plans because corporate profits have been solid and interest rates are low.

“The market has priced in tax reform,” Lonksi said. “On the other hand, if it doesn’t get passed, I don’t think the market necessarily takes an extended dive for the simple fact that the market will ultimately be driven by the outlook for profitability, which while not great, is sufficient.”

Lonksi said he thought Mnuchin was exaggerating the effect on the stock market to increase pressure on Congress.

“There’s a political motivation to that statement,” he said of Mnuchin’s warning. “I don’t necessarily think you’re going to see a 10[%]-20% correction for the equity market in the event that tax reform dies.”

Jack Ablin, chief investment officer of BMO Private Bank in Chicago, said he believed that investors are putting the chances for major tax legislation at about 50% after it appeared to be dead in August.

“If corporate tax reform doesn’t get done, then why should the market go any further back than August when investors assumed it wasn’t going to get done,” he said. That would be about a 6% correction.

Mnuchin on Tuesday raised expectations for tax-cut legislation by giving his “absolute guarantee” that Congress would send a tax bill to Trump to sign by the end of the year. His statement came after Trump and Senate Majority Leader Mitch McConnell (R-Kent.) tried this week to downplay expectations of passage this year.

Ablin said he thought Mnuchin’s comments were made because he realizes his job could be on the line if a tax overhaul isn’t enacted. Mnuchin is leading the Trump administration’s tax overhaul efforts with Gary Cohn, the top White House economic advisor.

In February, Mnuchin said the administration wanted to get a tax overhaul enacted by Congress’ August recess.

Valliere said Mnuchin showed his inexperience in making the guarantee.

“Whether we get it on Dec. 20 or we get it on March 20 is not that crucial for the markets. The markets just want to be assured this thing is progressing,” he said. “I’m a believer that it’s better to set low expectations than to try to meet high expectations.”