Infrastructure. It is the big legislative issue in Washington, D.C., and it’s a potentially big issue for the economy and the equity markets, depending on how the situation plays out.
As of this writing, there are multiple confusing issues coupled with a lack of clarity on just what might happen, and what it will actually mean for financial markets going forward — and what that means for us, as investors.
So, how do we make sense of all of this? Well, fortunately, I have a Wall Street insider tapped into the machinations in Washington on this issue. And he also happens to be an expert on interpreting this situation from the market’s perspective. Best of all, I get my insider’s views on this, and just about every major market issue, every trading day well before the market opens.
In a moment, I will tell you how you can get this same inside market intelligence along with me, and in a five-minute read each morning, but first, let me share with you what my insider has to say about the state of the infrastructure bill…
The market has experienced infrastructure headline whiplash over the last few trading days, so I want to take a few minutes to update 1) What has happened, 2) If an infrastructure bill is likely and 3) What it all means for markets.
First, as a bit of background, the market “cares” about infrastructure because the federal government spending money to build roads and bridges amounts to economic stimulus. More stimulus means a likely stronger economic recovery, and that’s positive for cyclical stocks and value, which is why they rallied last week on the infrastructure news — and why they dropped on Monday amidst more infrastructure confusion.
However, I want to be clear that while infrastructure is essentially more stimulus, it doesn’t compare, at all, to the COVID-19 stimulus bills. The current infrastructure bill is around $1 trillion in total, but only about $600 billion in new spending, spread over five to eight years.
Point being, the infrastructure bill isn’t going to produce anything close to the economic benefit we’ve seen with the COVID-19 stimulus bills, so we shouldn’t expect it to materially boost the recovery, although clearly it will add more fuel to the economic fire. Bottom line, if the current infrastructure proposal actually passes, it’ll be an incremental positive for the economy, but not anything close to a bullish gamechanger.
So, what is the current state of the negotiations? In a word, muddled.
Late last week, President Biden walked back the “we have a deal” sentiment when he said he would not sign the bipartisan infrastructure bill unless it was accompanied by a “human infrastructure” bill that addresses social issues but also will likely increase corporate taxes (and maybe capital gains taxes). Biden hedged that condition over the weekend, but at this point it is unclear if Republicans will support the bipartisan bill unless there are guarantees it can pass on its own. If not, it is unclear if Democrats will pass the bipartisan bill and the human infrastructure bill on their own.
Here’s why that matters. From a market standpoint, the best outcome is for the bipartisan infrastructure bill to pass on its own, and not have the human infrastructure plan pass. I say that because the net economic impact would be more stimulus (increase infrastructure spending) but no tax increases.
The second-best outcome for markets would be for nothing to happen at all. No bipartisan infrastructure bill and no human infrastructure bill. I say that because while the economy would not get additional stimulus, companies and consumers would not get a tax increase either.
Finally, the worst outcome, again from a market standpoint, is that both the bipartisan bill and the human infrastructure bill pass. I say that because while the bipartisan bill would provide some economic boost, it would not be material and it would be spread over the next several years. Conversely, the increase in corporate taxes designed to fund the human infrastructure bill would immediately reduce expected 2022 earnings (and perhaps expected 2021 earnings, if the bill was retroactive). And that would be a new, unanticipated headwind on stocks.
To be clear, I don’t think this outcome, by itself, would cause a correction. But if it was later complemented by a more-hawkish-than-expected Fed and an uptick in the COVID-19 Delta variant, then we would have the recipe for a correction in the coming months.
The analysis here is outstanding, and it is what you can expect each day from my market insider.
If you already subscribe to one or more of my newsletter advisory services, you know that I put a lot of research into each issue, and that I back up our investment decisions with that in-depth research. Well, a lot of my knowledge is bolstered by my market insider, as he is not only a friend, but he is also one of the smartest and wisest Wall Street analysts I know.
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That means you’ll know what to do ahead of time, whichever way the market swings… and you’ll know why and where the profit zones are.
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When the Sun Don’t Shine
I like it better when the sun don’t shine
I’d much rather watch the clouds go by
Or watch the moon peak into my room
A little rain to make the roses bloom…
–Drive-By Truckers, “Sun Don’t Shine”
If you live anywhere in the Western part of the United States, you know that it has been brutally and uncharacteristically scorching. Record temperatures in Oregon, Washington and Idaho have left many residents hunkering down and trying to do anything to stay cool. So, if you are experiencing this the way I am in Southern California, please make sure you keep hydrated (I prefer Alkaline88 water for this task), plan any outdoor activities in the early morning or well after sundown, and make sure that you check on the well-being of any seniors or others who may be particularly vulnerable to the extreme heat. Oh, and if there is a silver lining to these severe conditions, perhaps it is that we can learn to better appreciate those times when its cloudy, raining — and when the sun “don’t shine.”
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.