The resilient stock market has moved on and is zeroed in on tax reform, the policy that has had the most punch for stocks since the election.
The market is expected to quickly move past the fallout from the House's failure to vote on a plan to replace Obamacare, and watch the play by play on President Donald Trump's promise to start work on reducing corporate and individual taxes.
In a dramatic turn of events Friday, Republicans pulled their bill to replace Obamacare for lack of support, despite Trump's personal investment in the negotiations.
"If they can get past this and move on to Trump's other programs, the market will breathe a sigh of relief," said Art Hogan, chief market strategist with Wunderlich Securities. Stocks seesawed during Friday trading, as prospects for the bill's passage dimmed. When the bill was pulled, stocks came off session lows and closed mixed after a week of volatile trading.
But the market will now have to digest the fact it may get a tax bill with less oomph, since tax writers were relying on the tax cuts that would have come with eliminating the Affordable Care Act.
The fate of the health-care bill had become a key focus for the markets, which fretted failure to replace it was a sign that other parts of the Trump agenda could run into trouble.
"That was the definition of anticlimactic. I don't think it necessarily spells doom and gloom for the rest of the pro-growth agenda. The one thing is it does complicate tax reform because the way the rules were for the budget, this was going to clear some room in terms of spending," said Tom Simons, money market economist at Jefferies. "It doesn't mean it's [health care] going to be permanently dead. It could play out over the next several months."
Analysts say the repercussion for the market could have been much more negative, had the vote been taken and failed, with the spotlight then landing on disharmony between Republicans. That would have cast doubts on Trump's other policies, especially tax reform, the promise of which has been lifting stocks. Unclear is how much the market was anticipating a super low corporate tax rate of 20 percent, and how it will react if tax reform does not bring what was expected.
"It's hard to know, after this week, how much of that was priced in. … It's not going to be [a corporate tax rate of] 15 or 20 percent. It could be 25 percent or 30 percent. It will be incremental. It will be tax reform light because you won't have the savings from repeal and replace," Hogan said.
Richard Bernstein, CEO of Richard Bernstein Capital Management, said the market is hyper-focused on Washington now, just as it had been during the Reagan era in the 1980s when he was pushing tax reform and deregulation. Despite the positives Reagan is credited with, Bernstein said not every day was positive, and the market was sometimes worried, including about his big budget deficit. While this is a different time, there are still some similarities.
"If you're an investor and you're going to watch Washington, you're probably going to get an ulcer," said Bernstein. "You can remain sane and follow the fundamentals or you can drive yourself nutty and follow Washington. The market right now is following Washington and you're seeing the jitteriness in the market. If Washington continues to govern like Keystone Cops, the market will not react positively."
Bernstein said he still expects the market to do well. "If the president didn't deliver 100 percent, you were bound to get some kind of insecurity in the stock market, but I think what people are forgetting is the underlying fundamentals are still there, and that's what's going to drive the stock market," he said.
Despite the rockiness of the past week, the S&P 500 was down just 1.4 percent at 2,343, and the Dow was off 1.5 percent at 20,596.
Besides Washington, markets in the week ahead will get some key data on Friday. There are $88 billion in two-year, five-year and seven-year Treasury notes auctioned Monday through Wednesday.
The most important data is the personal income and spending data Friday, which includes the personal consumption expenditures inflation data, the Fed's preferred metric for inflation.
"That will be interesting because we will get the deflator, and we'll see if the Fed gets its 2 percent inflation target. Even if it's flat on the headline, you will get to 2 percent year over year for the first time since April 2012," said Simons.
Speaking of the Fed, there are more than a dozen Fed speaking appearances in the coming week, including Fed Chair Yellen who speaks Wednesday on the challenges of developing the workforce in low-income communities.
What to Watch
Monday
1:15 p.m. Fed President Charles Evans
6:30 p.m. Dallas Fed President Robert Kaplan
Tuesday
8:30 a.m. Adv. econ indicators
9:00 a.m. S&P Case-Shiller HPI
9:45 a.m. Services
10:00 a.m. Consumer confidence
12:45 p.m. Kansas City Fed President Esther George on the economy and policy
12:50 p.m. Fed Chair Janet Yellen speaks on workforce development challenges in low-income communities
1:00 p.m. Dallas Fed President Robert Kaplan
4:30 p.m. Federal Reserve Governor Jay Powell
Wednesday
9:20 a.m. Chicago Fed's Evans
10:00 a.m. Pending home sales
11:30 a.m. Boston Fed President Eric Rosengren
1:15 p.m. San Francisco Fed President John Williams
Thursday
8:30 a.m. Jobless
8:30 a.m. Q4 Real GDP
9:45 a.m. Cleveland Fed President Loretta Mester
11:00 a.m. Dallas Fed's Kaplan
11:15 a.m. San Francisco Fed's Williams
4:30 p.m. New York Fed President William Dudley
Friday
8:30 a.m. Personal income
8:30 a.m. Consumer spending
8:30 a.m. Core PCE prices
9:45 a.m. Chicago PMI
10:00 a.m. Consumer sentiment
10:00 a.m. Minneapolis Fed President Neel Kashkari
10:30 a.m. St. Louis Fed President James Bullard