Average Annualized Return Per Closed Trade: 17.9%
Average Return Per Closed Trade: 15.5%
Average Holding Period: 320 days

Stocks reacted very positively to the outcome of the French election last Sunday. Ex-investment banker and ex-economic minister Emmanuel Macron took first place with 24.0 percent of the votes, while Marine Le Pen won second place with 21.3 percent. The two will face off against each another on May 7 in round 2; the winner of this runoff wins the presidency.

Since the results of the first round were largely in line with what the polls predicted and, importantly, didn’t show stronger-than-expected support for Le Pen, the markets breathed a major sigh of relief. The pro-business and pro-EU centrist Macron is by far investors’ preferred candidate over Le Pen, who promises to pull France out of the euro zone and perhaps the EU. It wasn’t that long ago that the Grexit crisis riled markets for months. A potential “Frexit” would likely create far worse ripples.

Although Le Pen won 1.2 million (or nearly 20 percent) more votes than she did in 2012, which reflects the troubling growing momentum of the nativist movement in France, betting markets currently only give her a less than a 13 percent chance to win. Head-to-head polls show Macron holds a commanding lead (greater than 20 percentage points) over Le Pen. 

The anticipation for President Trump’s tax-cut plan likely also gave some help to stock early on this week. However, the actual document, which stated that it is “The Biggest Individual And Business Tax Cut in American History,” is only one page long and contained scant details. For example, the plan states that the seven income tax brackets would be reduced to three brackets of 10 percent, 25 percent, and 35 percent, but it’s unknown what income ranges those brackets would apply to.   

Furthermore, the plan looks similar to the (also) one-page tax-cut plan released last September during the campaign. The notable differences are this time Trump didn’t clarify where the tax brackets will be and he seeks to eliminate of state and local tax deductions.

Budget reconciliation rules in the Senate, which would allow the GOP to pass a bill with just 51 votes instead of 60 as long as the bill doesn’t add to the deficit after 10 years, would not apply here. The nonpartisan Tax Policy Center estimates Trump’s plan (which includes a proposed corporate tax reduction from 35 percent to 15 percent) would cost at least $6 trillion in a decade’s time. Thus, based on what little is known about Trump’s plan, it will unlikely pass. Furthermore, the cuts would likely drive interest rates sharply higher as well.

Given the lack of new details that would increase the chances of the plan’s passage in Congress, financial markets reacted with but a yawn to the tax plan. Clearly, a lot more work needs to be done on the tax reform front.  

Since the election the stock market has risen to historically high valuations based on expectations that Trump’s economic policies will lead to faster growth, but so far there’s been no concrete development in this regard. Today the U.S. Bureau of Economic Analysis reported a soft first estimate of first-quarter GDP growth: at just 0.7 percent (annualized), it was the weakest print in three years. While the U.S. economy isn’t in danger of recession, it has struggled to maintain a consistently strong rate of growth.  

We eagerly await the new president’s infrastructure plan because we think infrastructure investment and development will be the surest way to boost productivity and growth, but so far the new administration has spent political capital on health care reform that went no where and now a tax cut plan that has little chance of passing.

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