A number of political loose ends got tied up in the closing weeks of 2017, but investors will have plenty of market-moving headlines to contend with in 2018 as well. Here’s a look at four developments unfolding in Washington and some stocks that could be impacted.
Try as they might, President Trump and the Republican-controlled Congress were unable to get healthcare reform or even a straight repeal of the Affordable Healthcare Act, passed in 2017. However, the recent tax reform plan did successfully eliminate the ACA’s controversial individual mandate that penalized uninsured Americans.
Looking ahead, Bernstein analyst Lance Wilkes predicts Democrats will regain at least one house of Congress in 2018, leaving Republicans a very narrow window to take another crack at health care reform this year. In the meantime, healthcare investors should concern themselves with a much nimbler catalyst impacting the sector—Amazon.com.
“We believe the retail pharmacy model is highly susceptible to disruption by online pharmacy (e.g. Amazon),” Wilkes recently wrote. In addition to Amazon, Wilkes said Anthem is the nest-positioned health care stock to benefit from tax reform and pharmacy benefit manager market growth in 2018.
Most Republicans will likely say tax reform was their single largest political accomplishment of 2017. The new tax law cuts income taxes for individuals, but eliminates many of the deductions that itemizers took advantage of in the past. These modifications make the new law somewhat controversial when it comes to individual income taxes, but the massive corporate tax cuts are good news for American companies and investors across the board.
The corporate tax rate was cut from 35 percent to just 21 percent. The biggest winners from these cuts will be American companies with mostly domestic businesses. Overall, UBS estimates S&P 500 stock earnings will increase by more than 9 percent in 2018 thanks to the tax cut.
Regional banks, such as Zions Bancorp could get up to a 16 percent earnings boost, according to Keefe, Bruyette & Woods. Barclays says telecom stocks, such as Verizon and AT&T will also be big winners from lower U.S. taxes.
The tax bill includes a one-time repatriation tax holiday for companies with cash stashed overseas. Those companies can now bring that cash back into the U.S. economy and pay a rate of just 8 to 15.5 percent instead of 35 percent. Stocks like Apple, Microsoft and Cisco Systems, all of which have more than 90 percent of their cash overseas, could be big winners from repatriation.
Investors can anticipate companies will use that cash to reinvest in the business, potentially increasing the number of mergers and acquisitions. Some companies have also already begun increasing share buybacks and dividend payments, which can help support stock prices.
Finally, just this week, U.S. Attorney General Jeff Sessions announced he is rolling back an Obama-era directive instructing federal prosecutors not to pursue charges against businesses selling marijuana in states in which cannabis is legal. The news theoretically puts all U.S. marijuana businesses at risk of prosecution.
The news came just days after California officially legalized recreational marijuana use for the first time. So far, cannabis investors seem to be calling Sessions’ bluff, sending shares of Canopy Growth, Aphria,and the ETFMG Alternative Harvest ETF all higher by more than 5 percent in the early days of 2018. However, if Sessions decides to back up his words with an actual crackdown at some point, weed stocks and ETFs could see tremendous downside.
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