Last week we saw the straw outline for the Trump administration's tax reform proposal. The initial proposal is light on details and will likely be the opening bid in negotiations. It is too early to tell if bipartisan tax reform can be accomplished or if the budget reconciliation process will be used to make temporary reforms. I don't expect corporate taxes to be reduced to 15%, as 20-25% seems more probable, and estate tax repeal likely won’t make the final package. However, I do expect a sizable tax reform bill to be passed this year. It will be interesting to see if infrastructure spending can entice any Democrats to support the proposals.
This week the Federal Reserve (Fed) meets and will announce its decision on Wednesday. I expect the Fed to keep rates unchanged but will be watching for more details on any reduction in the Fed's balance sheet. I continue to believe bonds are underpricing increased deficits, rising short term interest rates and pro-growth regulatory reform. Bond yields have defied expectations of an increase this year, but I do expect them to rise over the next several months.
The April employment report will be released on Friday, and I expect more than 200,000 jobs to have been added last month, helping to reverse the weak reading from March.
In this environment, I remain constructive on stocks and defensive on fixed income.
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