July 12, 2021 BARRON’S 17
THE ECONOMY
Democratic-backed proposals on infrastructure
spending rangefrom $3 trillion to $10 trillion.
Some observers think a bill could fall through.
Markets Have Priced In
An Infrastructure Bill.
What If It Isn’t Passed?
I
nvestors have a lot to worry
about lately, with Covid-
variants threatening to under-
mine the global economic re-
covery, persistent labor and
supply shortages pushing
prices higher, and uncertainty
over monetary policy weighing on
sentiment.
There is another emerging risk—
depending on how you look at it—that
many are missing.
President Biden has proposed
roughly $4 trillion in new infrastruc-
ture spending, but Democrats are far
from an intraparty agreement. Sen.
Bernie Sanders, a Vermont indepen-
dent who caucuses with Democrats, is
floating $6 trillion in infrastructure
spending, House progressives are call-
ing for $6 trillion to $10 trillion, and
Sen. Joe Manchin (D., W.Va.) is sug-
gesting he would support around $
trillion in such spending.
That disharmony comes as Demo-
crats stare down an important dead-
line at the end of the month: If they
don’t pass a budget resolution before
Congress goes into recess on July 30,
the risk increases that little of Biden’s
economic agenda will become law,
says Andy Laperriere, head of U.S.
policy research at Cornerstone Macro.
While seemingly wonky, a budget
resolution is the easy part. It’s essen-
tially a deal on priorities and top-line
numbers, sans specifics over how to
slice and dice. If Democrats can’t get
that done before the end of July, says
Brian Gardner, chief Washington pol-
icy strategist at Stifel, it is a sign of
deeper problems with the underlying
spending bill. The resolution serves a
second function. Without it, Democrats
can’t use reconciliation—the only way
to pass their economic plan without
Republican support, Laperriere says.
“If Democrats can’t work out their
differences [now], why will they be
able to do so late this year or early
next year when members of Congress
get more risk-averse as the midterm
elections get closer?” Laperriere says.
For financial markets and an econ-
omy that have relied on massive fiscal
spending to climb out of coronavirus-
induced depths, a potential collapse of
Biden’s economic agenda is a threat—
particularly at a time when virus con-
cerns are rising anew and the Federal
Reserve has opened the door to with-
drawing some of the extraordinary
support it launched last year.
“The passing of the plan has been
priced in,” says Gardner. “Investors
looking for more funds from the gov-
ernment—to the extent those funds
will be less or none—will cause inves-
tors to question the strength of the
reflation trade...[and] the strength of
the economy.”
There are signs some investors
have become anxious about the stale-
mate. Jefferies analyst Hamzah Mazari
created a basket of stocks levered to
infrastructure, which includes Eagle
Materials (ticker: EXP), Nucor
(NUE), Martin Marietta Materials
(MLM), and United Rentals (URI).
The basket is up 84% over the past 12
months, well outperforming the
broader-market S&P 500, which is up
36% over the same period.
Recently, Mazari’s infrastructure
basket has started to underperform:
Over the past month it is down 8%
compared with a 2% gain in the S&P
500; over the past week, it’s off 3% as
the S&P 500 is roughly flat. That in
part reflects concerns that growth is
peaking and bubbling inflation will
diminish profit margins.
What it also suggests, says Mazari,
is that the part of the market most
sensitive to infrastructure spending
has started to get jumpy. He highlights
Wesco International (WCC), one of
the biggest electrical-wire and cable
distributors. The stock has surged
208% over the past 12 months, but it
is down 7% over the past month in a
sign of infrastructure nerves.
“This is a big risk,” Mazari says,
placing 60% odds of Biden’s spending
plans making it through. “We think
you could see these stocks give up a
lot of the 84% gain” notched over the
past year.
That’s a potential warning for the
broader stock market. But there could
be a silver lining, in a roundabout way.
“The prospect of significantly more
federal spending that keeps the twin
deficits in historically high territory
poses a longer-term inflation risk to
the economy,” says Joe LaVorgna,
chief economist of Americas at
Natixis, referring to a record-high
ratio of debt to gross domestic product
(it’s set to hit 17% this year) and a ris-
ing current-account deficit.
By that logic, a faltering of the Biden
administration’s spending plans could
alleviate some inflation pressure. If that
is the case, the Fed may have more
room to leave ultraeasy monetary pol-
icy in place for longer. Minutes from
the Fed’s June meeting revealed that
policy makers started discussing the
eventual tapering of $120 billion in
monthly Treasury and mortgage-
backed securities purchases, but it is
clear that many officials would prefer
later versus sooner and even the more
hawkish members say it is too early to
debate interest-rate increases.
If trillions in new spending doesn’t
pass, especially at a time when inves-
tors are increasingly worried about
economic growth peaking, it should
weigh on the Fed’s thinking. “My
guess is that it would lead the Fed to
be even more cautious than they al-
ready are,” says Stifel’s Gardner.
There’s your potential silver lining.
Scrapped spending plans would give
the Fed more breathing room, says
Nancy Tengler, chief investment offi-
cer at Laffer Tengler Investments,
“and that is what the market cares
about.”
Big spending through lockdowns
and layoffs helped the economy and
financial markets from falling further
and recovering more slowly, Tengler
says, “but one of the biggest risks go-
ing forward is profligate spending,”
given the impact on money supply and
taxes.
Assuming continued loose mone-
tary policy, despite expectations for a
slowing economy, Tengler has been
adding high-growth stocks to clients’
portfolios. She recently initiated a
position in Adobe (ADBE) and has
been adding to her positions in Ama-
zon.com (AMZN) and Corning
(GLW), which makes iPhone screens.
For investors, infrastructure uncer-
tainty is an additional—and underap-
preciated—near-term risk to the econ-
omy and markets. On net, though,
infrastructure’s loss may be the
broader market’s gain, if it means eas-
ier money for longer.B
Infrastructure Interrupted
Stocks tied to infrastructure spending plans have
outperformed over the past year. That’s been changing in
recent weeks and months.
Source: Jefferies
U.S. Infrastructure Basket Average
S&P 500
Underperformance / Overperformance
of Infrastructure Basket12 Months3 Months1 Month1 Week-0.25% 0 0.25 0.5 0.75 1.By Lisa Beilfuss