What effect will tax reform have on the Stock Market?
Tax law changes can have a significant effect on the economy, and on the stock market in particular. What is more concerning is not if tax reform is passed by Congress, but if it is not passed. By early next year, if tax reform is not passed, we could see a significant decline in asset prices. This is because the essence (not specifics) of tax reform is already "priced in" by the markets.
If the proposed tax reform is not passed by Congress, then the assumed reduction in corporate taxes will not occur. Thus, the "priced in" future earnings (which all stock prices are based on) will not occur. If the assumed future earnings will not occur, the the valuation calculations for all stocks should be 10% to 25% lower than the current prices. Does that mean a 10-25% drop in the market should be expected if the tax reform bill is not passed in Congress? In a word, yes.
If tax reform is not passed by Congress by early next year, not only should a 10-25% drop in the market be expected, but it could be much more. Once the market starts to slide, there is always the possibility that panic could ensue, which would only serve to drive the market lower. Therefore, I believe that a market selloff could occur by early 2018 if the tax reform package is not approved by Congress