Republicans face their first real test in the House. While a "repeal" would have been easy, a "replace" reveals a chasm within the Republican party. The Tea Party Republicans took hold in 2010 on a promise to unwind the Affordable Care Act and to de-emphasize government involvement. That is directly at odds with any plan to replace the health care law with a new law that still provides any government subsidy. Then there are the Republicans from more religious states, where it is the emphasis on Christianity and family values that drives the narrative. However, many of these areas are poor, and health care does matter to them and their congressional leaders. To offer enticements to one side offends the other, and therefore cannot gain traction of the absolute majority.
This is a case of dominoes. First, the health care proposal ends certain taxes on Wall Street that were imposed to help pay for the bill. Wall Street liked that. The budget proposal relies on the drop in healthcare spending or it doesn't even come close to meeting deficit objectives. No budget means no chance for an infrastructure spending package. No way to fake a potential for 4% GDP growth, then no way to pass a tax cut on individuals and corporations. A President's political capital is highest in the first 100 days. That is why we watch it so closely. If Trump fails to win this vote, he is probably not seeing a budget in 2017.
If you are a Republican House member, you are up for re-election in 2018. Voting against or for a health care repeal could help or hurt you locally. Now you have to add the unknown, how the whole Russia connection might mire Trump's reputation. If you are with him, and things go south for Trump, it will be hard to distance yourself before elections. If you are against him, regardless of how things go for Trump, he will push for the party to be against you in the elections. So how do you vote?
Thursday, the House is "supposed" to vote, but that doesn't mean that they "must". There in lies the rub. If they don't have the votes, it will be delayed. A delay will be viewed as a sign of weakness and failure. The market will fear the dominoes falling, unwinding much of the benefits of the Trump Rally we have seen on Wall Street. This does not mean we go back to the November levels, for two reasons. 1) Wall Street was bracing for a Hillary win, and possible repercussions against bank and Wall Street brokers. That relief bump won't go away. 2) The economy was improving, despite the "disaster" comments by Trump. This is an economy on solid footing with employment improving, housing strong, and rates still low. 3) Earnings season starts in just a few weeks, and earnings tend to support the bulls. For these reasons, we would have been positive with a 19,500 level on the Dow without all the Trump promises.
The pullback anticipated throughout February and March is being weighed late. The market peak on March 1 was the high, and it's been in a slow slide since. The drift has turned into a pullback. "Pullbacks" are considered 3% to 5%, or Dow 20,500 down to 20,050. A bad day tomorrow and we could be there.
This is one of those moments where one needs to plan to ride out the storm or get out of the way before it hits, not decide in the middle that it was worse than anticipated. The indicators have rolled over. One should not bank on a positive outcome. If the vote goes in favor of Trump, there will be time to get back in on a bullish trade. This is not "yes" or "no". The "hold off" category could be as high as 50%, meaning the odds are against a "yes" vote. Be prepared.