A fall in infrastructure spending could stimulate markets. Here’s why.
Investors have a lot to fear lately, with variants of Covid-19 threatening to undermine the global economic recovery, persistent labor and supply shortages pushing up prices and uncertainty over monetary policy weighing heavily. on feeling.
There is another emerging risk, depending on how you view it, many of which are missing.
President Biden has proposed around $ 4 trillion in new infrastructure spending, but Democrats are far from an intra-party deal. Senator Bernie Sanders, an independent from Vermont who caucuses with Democrats, spends $ 6 trillion on infrastructure spending, House Progressives are asking for $ 6,000 to $ 10,000 billion and Senator Joe Manchin (D., W.Va.) suggests he would. support about $ 3 trillion in such spending.
This discord comes as Democrats set an important month-end deadline: If they don’t pass a budget resolution before Congress is suspended on July 30, the risk increases that little of Biden’s economic agenda will become law. says Andy Laperriere, head of US policy research at Cornerstone Macro.
While seemingly flawed, a budget resolution is the easy part. It’s basically an agreement on priorities and numbers on the front line, with no specifics on how to slice and dice. If Democrats can’t do this before the end of July, says Brian Gardner, chief Washington policy strategist at Stifel, it’s a sign of deeper problems with the underlying spending bill. Resolution fulfills a second function. Without it, Democrats cannot use reconciliation, the only way to get their economic plan through without the support of Republicans, Laperrière says.
“If the Democrats cannot settle their differences [now], why will they be able to do so at the end of this year or early next year when members of Congress become more risk-averse as the midterm elections approach? Said Laperrière.
For financial markets and an economy that have relied on massive budget spending to emerge from coronavirus-induced depths, a potential collapse of Biden’s economic agenda is a threat, especially at a time when concerns about the virus are mounting. again and the Federal Reserve has opened the door to withdraw some of the extraordinary support it launched last year.
“The adoption of the plan was built into the price,” Gardner says. “Investors looking for more government funds – to the extent that these funds are less or nonexistent – will cause investors to question the strength of the reflation trade…[and] the strength of the economy.
There are signs that some investors are concerned about the impasse. Jefferies analyst Hamzah Mazari created a basket of leveraged infrastructure stocks, which includes
Martin Marietta Materials
(URI). The basket is up 84% over the past 12 months, significantly outperforming the larger market’s S&P 500, which is up 36% over the same period.
Recently, Mazari’s infrastructure basket has started to underperform: over the past month, it is down 8% versus a 2% gain for the S&P 500; over the past week it is down 3% as the S&P 500 is roughly stable. This in part reflects concerns that growth is peaking and bubbling inflation will squeeze profit margins.
What this also suggests, says Mazari, is that the part of the market most sensitive to infrastructure spending has started to get choppy. It highlights
(WCC), one of the world’s largest distributors of electrical wires and cables. The stock has jumped 208% in the past 12 months, but is down 7% in the past month, a sign of nervousness in infrastructure.
“It’s a big risk,” Mazari says, placing a 60% chance that Biden’s spending plans will materialize. “We think you could see these stocks give up much of the 84% gain” recorded over the past year.
This is a potential warning for the stock market at large. But there could be a silver lining, in a roundabout way.
“The prospect of a significant increase in federal spending that keeps twin deficits in historically high territory poses a long-term inflation risk to the economy,” said Joe LaVorgna, chief economist of the Americas at Natixis, referring to a record debt-to-indebtedness ratio. gross domestic product (it should reach 17% this year) and a growing current account deficit.
By this logic, a hesitation in the Biden administration’s spending plans could ease some inflationary pressures. If so, the Fed may have more leeway to leave super-easy monetary policy in place for longer. The June Fed meeting minutes found that policymakers have started discussing the possible $ 120 billion reduction in monthly purchases of treasury and mortgage-backed securities, but it is clear that many officials would rather later than sooner and even the most hawkish members say it’s too early to debate interest rate hikes.
If trillions in new spending don’t pass, especially at a time when investors are increasingly worried about a spike in economic growth, that should weigh on the Fed’s thinking. “I guess that would cause the Fed to be even more cautious than it already is,” says Gardner of Stifel.
Investors looking for more government funds – to the extent that these funds are less or nonexistent – will cause investors to question the strength of the reflation trade …[and] the strength of the economy.
There’s your potential silver lining. Abandoned spending plans would give the Fed more leeway, said Nancy Tengler, chief investment officer at Laffer Tengler Investments, “and that’s what the market cares about.”
The big spending related to lockdowns and layoffs has helped the economy and financial markets continue to decline and recover more slowly, Tengler says, “but one of the biggest risks going forward is overspending.” , given the impact on money supply and taxes.
Assuming monetary policy remains loose, despite expectations of a slowing economy, Tengler added high-growth stocks to his clients’ portfolios. She recently launched a post in
(ADBE) and added to his posts in
(GLW), which manufactures iPhone screens.
For investors, infrastructure uncertainty is an additional – and underestimated – short-term risk to the economy and markets. On the net, however, the loss of infrastructure can be the gain of the market at large, if it means easier money for longer.
Write to Lisa Beilfuss at email@example.com