US fiscal stimulus

A few questions we’ve received about the fiscal stimulus measures, associated with the Build Back Better (BBB) and the Infrastructure Investment and Jobs Act (IIJA), namely will it boost growth or drive rates, or have any larger overall investment implications?

Our basic view is that it is great for people (more money to be spent on child care, education, housing, health) and modestly good for commodities (the climate related investment requiring more of the usual mix of stuff, like aluminium, copper etc).

We say modestly, in context of commodities, because prices are already sky-high, and supply (markets) normally works its (their) magic over time, and as such we anticipate price declines, as a general starting point. The passage of additional demand, against a backdrop in which we expect prices to decline, is a good but not game changing, new development.

The spending initiatives above are to be paid for from various tax related initiatives, and so it works out to be broadly neutral to the budget, based on our understanding (i.e. spending is “paid-for”).

That means the good offsets the bad, and how beneficial it is for stockmarkets depends on how much of the “share of wallet” falls on listed companies. And it doesn’t seem like there’s much to get excited about there.

Plausibly, the higher taxes fall more greatly on the already very profitable margins of listed names, and the whole things winds up as a modest negative.

So, what’s our view. Good package, positive news for the “good society”, not a big market driver, tax incidence might render the whole thing a slight negative, if anything.

Longer run, we still expect modestly higher yields from here (e.g. a 10 year nominal treasury yield of ~2.5%) which would also be a modest negative to equity market valuations, however, should it accompany (coincide with) robust economic growth, it is more of a recalibration within equities (away from growth stocks, towards everything else), which is how we are positioned.

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