Big Speech, Little News

President Joe Biden delivered the State of the Union address last night, and if we are judging purely on the mechanics, we must give his speechwriters demerits for committing a cardinal offense: saving the thesis for the end of the speech.^[i] But aside from taking an hour to say the state of our union is strong, the message was overall what most observers expected. It started with a rousing statement of support for Ukraine and ode to the fearless people defending their country and way of life, which earned thundering—and well-deserved—bipartisan applause. We, too, were moved when Americans stood as one to support courageous people fighting for freedom. Yet that first section was really about the only fresh content. Everything that followed—the traditional, homeland-focused discussion—was a rehash of old initiatives and stalled legislation. Whether you find the proposals beneficial or counterproductive, there was nothing new, nothing markets haven’t already chewed over to death—and nothing that looks likely to become law anytime soon. In our view, nothing in this speech should be jarring—or rocket fuel—for stocks.

As always, whenever we discuss politics, please bear in mind we are approaching the issue as markets do. Stocks aren’t partisan and don’t focus on personalities, tone or any of the other subjective trappings. They also don’t really deal in “good” and “bad,” which are often just opinions anyway. For stocks, we think there are generally two main questions. One, do policies that risk creating winners and losers have a realistic chance of passing? Two, are they likely to pass in a form that is more extreme than what markets have already priced in? In other words, is there any surprise power? This is the lens through which we examine the State of the Union’s economic discussion.

It started with a verbal victory lap over last year’s American Rescue Plan and bipartisan infrastructure bill, touting all the money the latter will inject into the US economy and the long-term fruit improving roads and bridges will bear. Fair enough, but stocks are already quite familiar with this, and as we showed last year, the funds deploy too slowly to have much of a cyclical economic impact. Whatever your opinion of its merits, we don’t think it qualifies as economic stimulus.

From there, the speech moved to a smorgasbord of measures that have already encountered significant gridlock. Many of them, including the corporate minimum tax rate, were in the legislation formerly known as Build Back Better, which Congress is now trying to break up and pass piecemeal. Others, like the discussion of semiconductor fabrication plants, are in an industrial strategy bill aimed at countering China’s economic clout and the semiconductor shortage with massive subsidies. The Senate passed their version last year, but the House has already modified it significantly, making reconciliation between the two a tall order. Several other proposals were even older. Measures to reduce prescription drug prices have floundered for years under Democratic and Republican administrations alike. The “Cancer Moonshot,” as Biden acknowledged, is policy from the Obama administration—and an extension of the Nixon Administration’s War on Cancer from 1971. “Buy American” is over a century old.

The likelihood any of what Biden warmed up last night passes in a way that would shock stocks seems quite low. For one, gridlock has already watered these items down significantly since their campaign trail debuts. Those that passed the House have faced tough sledding in the 50/50 (plus Vice President Kamala Harris’s tiebreaker) Senate, where moderate Democrats have pushed back on several progressive priorities. Those that passed the Senate with a measure of bipartisan support have met resistance—and markup—from House Democrats’ progressive caucus. Some have argued passing Build Back Better’s provisions piecemeal improves the chances of getting some things through, yet Democratic senators are already coming out against some of what Biden said last night.

Then too, the clock is ticking. Midterm elections are but eight months away. Between the current polling and midterms’ long history of boosting the opposition’s clout, the likelihood of anything major passing in Biden’s third or fourth year in office is even lower than it is this year. Yet getting anything done before the clock runs out will also be a tall order. Campaigning has already started, with Texas holding the first round of its primary elections yesterday. Once it gets in full swing, the chances of legislation passing falls significantly. Not only will incumbents be out on the stump, but they will have little incentive to rock the boat or surrender precious wedge issues.

In our view, this points to escalating gridlock as this year rolls on, which should help stocks break out of the early-year funk. As we wrote when the year kicked off, US stocks are usually choppy in midterm election years’ first half or so, spooked by the uncertainty that erupts from campaigning. This year, the uncertainty over Russia’s full-scale invasion of Ukraine, along with rate hike jitters and inflation angst, have compounded that traditional volatility. It is an unpleasant test of investors’ fortitude. But as midterm years wear on and the increased gridlock becomes apparent, it usually creates late-year tailwinds that last into the New Year and beyond. A State of the Union that presents microwaved leftovers is right in line with this, in our view.