Editors’ Note: As always, our political commentary is non-partisan by design. We favor no politician nor any political party and assess political developments for their potential economic and market impact only.
The US finally got a look at President Joe Biden’s much-ballyhooed infrastructure plan on Wednesday, and the reactions were predictable. Proponents hyped its breadth and claimed it would turbocharge the recovery from lockdowns—even shift the US onto a higher plateau of growth for years to come. Opponents primarily took issue with the corporate tax hikes and debt penciled in to pay for it. We will save our discussion of taxes for another day. But love the plan or loathe it, we think there is a big risk of investors overrating the impact of all this on market returns to come. Perhaps most particularly, those projecting swift economic growth on the back of all this spending are likely to end up disappointed—as are those projecting an accompanying boom for value stocks.
Headlines call Biden’s plan a $2 trillion infrastructure package. That is mathematically true, depending on your definition of infrastructure, but it is incomplete. The administration’s fact sheet states plainly: “The plan will invest about $2 trillion this decade.” The boldface is ours, to draw your attention to the fact that this decade ends in just under nine years. $2 trillion in projected investing over eight-plus years isn’t stimulus hitting the economy today. It isn’t a $2 trillion demand boost in the here-and-now. It isn’t pump priming. It doesn’t multiply economic activity this year and next. It is simply an advertisement of the new administration’s preferred areas of budget focus, with most funds deployed over the medium to long term.
Even if it gets approved, there is no guarantee any of this spending and investment actually happens. Eight years is a long time. A new Congress could erase these long-term plans and set its own roadmap in two years. A new administration could do the same in four. It is normal for politicians to write and rewrite budgets endlessly. (To say nothing of gridlock watering this plan down considerably before passage even if the administration pursues budget reconciliation, negating the need for 60 Senate votes in favor.)
Now, we do give the administration style points for not advertising any of this spending as “shovel-ready.” That was the Obama administration’s adjective of choice for its infrastructure spending plans 12 years ago, and however well-intended, it was a misnomer. As America learned back then, there really is no such thing as shovel-ready projects. There are obvious candidates, of course. Anyone can name a bridge or transit system in need of an upgrade. But crumbling and ridden with potholes doesn’t mean “shovel-ready.” True shovel readiness requires permits, which usually requires approval from multiple agencies at the city, county, tribal, state or federal level—sometimes all five, depending on the project. A bridge that connects two states needs double the approval that a bridge connecting two towns does. One of your friendly MarketMinder editors lives in a county where voters have approved funding for the same transit project three times in two decades, with nothing to show for it. We doubt Biden’s plans for bridges, railways, electric vehicle charging stations, airports, power plants or all the rest go more smoothly.
President Barack Obama’s plan, advertised as stimulus, took several years to drip out. Some of it, like a much-heralded investment in solar startup Solyndra (which went bankrupt), amounted to sunk costs with no payout. Keep that in mind as you read about similar investment and private/public partnership plans in Biden’s proposal. But more broadly: If President Obama’s allegedly front-loaded stimulus didn’t live up to its reputation, how can anyone expect a slower spending drip from President Biden to be near-term economic rocket fuel?
Now, we don’t see the popular view of this as sentiment being radically detached from reality in a way that could signify a euphoric stock market peak. But there is a disconnect, and we think it has implications for relative performance. It isn’t limited to the challenges the administration will likely face in passing it.
For months now, people have been talking up value stocks as big stimulus beneficiaries. As the story goes, stimulus plus vaccines = big economic boom that benefits cyclical value stocks. That sentiment has fueled value’s recent leadership over growth.
But this “news” isn’t actually new to markets. Stocks have been assessing estimates of stimulus’ impact, infrastructure plans, tax changes and, yes, vaccines, for basically all of the last year. Arguing this will drive value leadership ahead is tantamount to arguing markets are fundamentally inefficient. That is a heckuva thesis and one we daresay has done in many investors over the years. As the stimulus plus vaccine = value leadership equation proves incorrect, growth stocks—which don’t need accelerating economic growth—probably regain the baton and extend their cumulative leadership since markets began rallying a year ago.
So if you are eyeing value stocks right now, it is time for a gut check. Is your enthusiasm based on an economic boom tied to trillions of stimulus dollars flooding into the economy? That thesis is shared by the vast majority of retail and professional investors, if our observations and fund manager surveys are any indication. Value stocks, in large measure, seem to already reflect such high hopes. This is a time to look forward to the high likelihood that post-lockdown economic growth looks a lot like pre-lockdown growth, an environment where growth stocks did best. Keep rational expectations and don’t get caught flat-footed by a frenzy gone wrong.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.