President Biden, seen at the White House in late June discussing infrastructure legislation, could see his economic plan shattered if a budget agreement isn’t reached by the end of July.
Getty Images/Kevin Dietsch
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Investors have a lot to be concerned about these days, with Covid-19 variations threatening to derail the global economic recovery, ongoing labor and supply shortages driving up prices, and monetary policy uncertainties impacting on confidence. Another developing concern, depending on how you look at it, is one that many people are overlooking.
President Biden has proposed $4 trillion in additional infrastructure spending, but Democrats have yet to reach an accord within the party. Sen. Bernie Sanders, a Vermont independent who joins the Democratic caucus, has proposed $6 trillion in infrastructure spending, while House progressives have proposed $6 trillion to $10 trillion, and Sen. Joe Manchin (D., W.Va.) has said he would support roughly $3 trillion. This discord comes as the Democrats face a crucial deadline at the end of the month: If Congress does not adopt a budget resolution before the July 30 recess, the risk of little of Biden’s economic agenda becoming law increases, according to Andy Laperriere, head of U.S. policy analysis at Cornerstone Macro.
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A budget resolution is the simple part, despite its appearance. It’s effectively a deal on priorities and top-line figures, with no details on how to chop and dice them. According to Brian Gardner, chief Washington policy strategist at Stifel, if Democrats can’t get that done by the end of July, it’s a symptom of larger concerns with the core funding package. A second purpose is served by the resolution. Without it, Laperriere claims, Democrats will be unable to employ reconciliation, which is the only way to enact their economic plan without Republican backing. “If Democrats can’t hash out their differences now, when members of Congress become more risk-averse as the midterm elections approach, how will they be able to do so later this year or early next year?” According to Laperriere. A potential collapse of Biden’s economic agenda poses a threat to financial markets and an economy that has relied on massive fiscal spending to claw its way out of coronavirus-induced abyss, especially at a time when virus fears are resurfacing and the Federal Reserve has hinted at withdrawing some of the extraordinary support it launched last year. “The plan’s passage has been factored in,” Gardner says. “Investors seeking more funds from the government—to the extent that such funds are fewer or nonexistent—will induce investors to doubt the strength of the reflation trade…[and] the economy.” There are evidence that some investors are becoming concerned about the impasse. Hamzah Mazari, a Jefferies analyst, put together a basket of infrastructure-related equities, which includes
Eagle Materials is a company that specializes in the
(stock symbol: EXP)
Nucor
(NUE),
Materials by Martin Marietta
(MLM), respectively.
United Rentals is a company that specializes in renting out
(URI). The basket has gained 84 percent in the last year, surpassing the S&P 500, which has gained 36 percent in the same time frame.
Mazari’s infrastructure basket has recently begun to underperform: It is down 8% over the last month, compared to a 2% rise in the S& it is down 3% over the last week, while the S& 500 is approximately flat. This indicates concerns that growth is nearing a nadir, and that rising inflation will eat into corporate margins. According to Mazari, this also indicates that the market segment most sensitive to infrastructure spending has begun to become jittery. He emphasizes
Wesco International is a company based in the United States
(WCC), one of the largest wholesalers of electrical wire and cable. The stock has increased by 208 percent in the last year, but it has dropped by 7% in the last month, indicating infrastructure concerns. “This is a major risk,” Mazari says, putting Biden’s spending plans at a 60 percent chance of passing. “We believe these equities will give back a significant portion of their 84 percent gain” over the past year. This could be a red flag for the stock market as a whole. In a roundabout sense, though, there may be a silver lining. “The prospect of significantly more federal spending that keeps the twin deficits in historically high territory poses a longer-term inflation risk to the economy,” says Joe LaVorgna, Natixis Americas chief economist, referring to a record-high debt-to-GDP ratio (set to hit 17 percent this year) and a rising current-account deficit. According to this argument, if the Biden administration’s expenditure plans falter, some inflation pressure will be relieved. If this is the case, the Fed may have more leeway in extending its ultraeasy monetary policy. According to minutes from the Fed’s June meeting, policymakers began discussing the eventual tapering of $120 billion in monthly Treasury and mortgage-backed securities purchases. However, it is clear that many officials would prefer to do so later rather than sooner, and even the most hawkish members say it is too early to discuss interest-rate hikes. If trillions in new expenditure fails to pass, especially at a time when investors are more concerned about the economy’s peaking, the Fed’s decision should be influenced. “My guess is that it will cause the Fed to become even more cautious than they are now,” says Gardner of Stifel.
“ Investors seeking more funds from the government—even if those funds are limited or nonexistent—will induce investors to doubt the soundness of the reflation trade…[and] the economy. ”
— Brian Gardner, Stifel’s chief Washington policy strategist
That could be your silver lining. According to Nancy Tengler, chief investment officer at Laffer Tengler Investments, scrapped expenditure plans would give the Fed more breathing room, “and that is what the market cares about.” Big expenditure through lockdowns and layoffs helped the economy and financial markets avoid additional declines and a slower recovery, according to Tengler, but “one of the major hazards going forward is excessive spending,” given the impact on money supply and taxation. Tengler has been adding high-growth equities to customers’ portfolios, assuming continuing easy monetary policy despite prospects for a slowing economy. She recently started a new job in
Adobe
(ADBE) and has been steadily advancing in her career.
Amazon.com
(AMZN) and (AMZN)
Corning
(GLW), a company that makes iPhone displays. Infrastructure uncertainty is a new — and underrated — near-term risk to the economy and markets for investors. However, if it means easy money for longer, infrastructure’s loss may be the broader market’s gain. Lisa Beilfuss can be reached at lisa.beilfuss@barrons.com./n
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