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Macro Update
So far this year, market influencers remain sporadic as:
- The delta variant re-establishes coronavirus restrictions and corporate requirements (mask requirements, etc.)
- Chinese regulatory headwinds weigh on emerging markets
- Federal Reserve (Fed) tapering guidance remains uncertain (though likely to start in 2023)
- Increases in inflation
- Mixed signals from bond markets (an unexpected decline in yields) and:
- A strong earnings season for large cap growth stocks muddle investor interpretations
Taking all this into consideration, let us put these market moving catalysts into context. The re-establishment of coronavirus restrictions will likely not be as extreme of an impact on society and business operations as the “growing pains” and social and business adjustments weathered after March of 2020 contain any large economic event. Chinese regulatory headwinds may persist as uncertainty regarding the scope of these regulations remain unclear, likely further negatively impacting Chinese based companies. Meanwhile, as I wrote in How to Weather the Risks of an Economic Recovery: Inflation, Increasing Rates & Tapering, Fed tapering is a normal monetary policy action with the fears of a repeat of the 2013 taper tantrum overdrawn. Though inflation has crept higher throughout 2021, reaching 30-year highs, a resurgence of the pandemic fears can rein in inflation before it continues to grow. However, the likelihood of persisting inflation continues to remain low. This coupled with the composition of recent data highlights that inflation can potentially remain transitory (but how transitory remains the central question). Furthermore, as yields and real yields decreased unexpectedly in late March of 2021, the argument that an inflationary increase is temporary holds, and inflation will likely continue to decelerate when COVID-19 induced supply-chain bottlenecks correct. Though inflation fears continue to creep into the picture, large cap growth companies continue to post strong earnings results, bolstering markets and instilling support for the economic recovery/growth.
The Infrastructure Deal
With the counterintuitive market landscape summarized, let’s analyze another potential market mover: the Infrastructure Deal. The revitalized $1 trillion infrastructure bill is in the process of being pushed through the chamber this week to hopefully send it to the House. This bipartisan package will include about $550 billion in new spending on roads, bridges, airports, waterways, broadband, water systems, power grids, and cryptocurrency IRS guidelines. The vast impact of the infrastructure deal will have a widespread jolt on financial markets and more importantly specific sectors. Some sectors may benefit from the monetary allocations of the deal, while others may be adversely affected either from monetary neglect or non-beneficial monetary allocations.
Positive Impact
Some of the companies poised to benefit from the new infrastructure bill are: Trucking/logistics, airlines/railroads, commodities, Internet providers, nuclear energy, pharmacy managers, and all industries with derivative exposures to these segments. Companies that heavily use roadways for travel, delivery, or transportation will likely benefit from the $100 billion investment to improve roads and bridges. These types of companies are in the sweet spot between benefitting from this infrastructure improvement without paying for it with a corporate tax or gas tax increase. Despite being roiled during 2020 with travel restrictions and the lingering social effects flowing over into 2020 and so far in 2021, airlines will likely benefit from an approximately $25 billion investment to upgrade airports, reduce emissions, and minimize congestion. Train Travel (such as Amtrack) will benefit from a $66 billion investment to upgrade the Northeast lines and propel new rail developments throughout the country. In the wake of the recent commodity supercycle as explained in Are Commodities on the Brink of a “Supercycle”, commodities may get further fundamental and macro support from the infrastructure deal. Roads, bridges, piping, railways, and all other associated projects will require materials. Therefore, metals (steel, aluminum, copper, etc.), cement, etc. may experience an increase in prices as demand and usage surges. Even though some commodities have hit 52-week highs, there still seems room for these commodities to soar in the intermediate and long-term as demand and usage remain elevated.
Meanwhile, internet providers emerged as a secret winner from the infrastructure deal as the U.S. subsidiaries set to focus on places with below average service, while helping customers pay for their services. The bill also states that the government cannot set rates, but low-cost broadband options remain a choice. The material impact will help the sector either directly or indirectly as the increased competition may spur the segment’s outperformance. On the other hand, companies exposed to nuclear energy could benefit (though in the near-term) as a $6 billion investment will likely prevent plant closures. However, this may be a short-term fix as long-term replacements (renewables and natural gas) become more mainstream and widely used. Lastly, some benefits for pharmacy conglomerates may be realized as the infrastructure deal is set to delay the regulation against drug rebates. This will reduce any immediate revenue or margin tightening on pharmacy conglomerates in the near-term.
Adversely Impacted
On the other hand, companies such as cryptocurrency exchanges, chemical polluters, and drugmakers may all experience an adverse effect to the deficit creating bill. For instance, provisions in the infrastructure bill stated an increase in IRS surveillance of cryptocurrency transactions. Cryptocurrency miners and brokers remain the most exposed to this increase in regulation and taxation transparency. Chemical polluters will experience one of the only tax increases in the infrastructure bill. This is a re-instatement of a polluters-levy (a tax through 2031) that taxed chemical companies to clean up waste sites. These companies will take a hit on margins and overall returns. Lastly, though the bill benefited pharmacies, it did adversely impact drugmakers as provisions require drugmakers to refund Medicare for drug waste. Companies that were the largest contributors to the drug waste in 2019 will likely experience negative optimism and weaker performance.
Neutral Impact
With all that said, some sectors over anticipated their benefits from the bipartisan deal propagation. Electric vehicles and clean energy manufactures were among these sectors. Electric vehicles and charging station companies expected roughly $175 billion from a Biden proposal presented at the beginning of this year, but these sectors were only given a measly $7.5 billion, or 4.28% of their expectation. Though this comes as a blow, a Democratic only bill to invest trillions in clean energy and electric vehicles paid by taxing the wealthy and corporations maintains some of the optimism. A similar case is for the clean energy manufactures as they only received $8 billion in tax credits. However, the Democratic only bill maintains some of the optimism.
Conclusion: The Infrastructure Bill Remains a Catalyst
Therefore, though there are numerous market catalysts culminating in August, that does not mean that opportunities have dried up. Rather, interpreting the market movers in the contexts of the macroeconomic situation highlights overreactions and underreactions within the market. These investor behavior inconsistencies are the building blocks to opportunities. With that said, large policy intervention in markets is resurfacing as a market mover. The infrastructure bill remains a catalyst that could impact markets. However, though a lot of the benefits and detriments are near-term, the positive impact on commodities appear to be a long-term benefit with deeper roots of fundamental improvement. On the heels of the commodity super cycle, commodities are expected to lead the perfect store for infrastructure deal outperformance.
