US government spending: the gift that keeps on giving?
Stock markets are becoming increasingly optimistic about the degree of relief help, particularly from the US government. But we don’t believe this can continue indefinitely. Here’s why.
Investors are in cheerful mood and the US government’s record relief spending programme is one of the key reasons why. Investor optimism is built largely on the grounds that as long as government largesse doesn’t feed through to higher prices for goods and services, or inflation, all is well with the world.
US President Joe Biden’s generosity with the American people seemingly knows no bounds. Just days after the COVID-19 relief bill was approved by Congress (the legislative branch of the US government) an even larger package – in excess of US$2 trillion – was announced. With a focus on infrastructure, plans are afoot to repair damaged roads across the US, mend bridges, give money to schools for major repair works, as well as launch initiatives to tackle climate change.
While the White House has portrayed its proposal as the most ambitious public spending in decades, we all know there is no such thing as a free lunch. Unsurprisingly then, the infrastructure package was unveiled alongside measures to increase taxes on businesses and the measures are expected to be spread out over eight years.
That said, we expect there to be stock market winners and losers from this initiative. This will depend somewhat on the detail, but we believe the general direction seems somewhat positive for green technology stocks and infrastructure builders, while higher tax rates would, in our view, be more favourable for sectors such as real-estate investment trusts that pay relatively little tax on the profits they generate.
Overall, our Asset Allocation team expects the effect of both extra stimulus and higher taxes to have a relatively small impact on stock markets. While our head of economics sees a 1% addition to the rate of US growth next year, this could be potentially more as any tax rises may be watered down in the usual round of political bargaining. Our general assumption is that with a tight majority in Congress, it will be easier to agree on spending rather than on raising taxes to pay for it.
Will inflation ever return?
A key reason behind our belief that higher inflation is unlikely to burst on the scene for any period of time is political. The November 2022 midterm US elections are already assuming importance, with all seats in the House of Representatives and 34 seats in the Senate up for grabs.
As is stands, the Democrats have a meagre nine-seat majority in the House; since the 1950s, the incumbent president’s party has tended to lose more than 20 seats during the midterm elections. The betting odds favour the Republicans to win a House majority, even though Biden’s policies have so far been popular.
If the Republicans win, US government spending will become more complicated; with Donald Trump out of the White House, many Republicans have suddenly rediscovered they need to be more careful about public finances. Just another reason to believe there probably won’t be sustained inflationary pressures in the US or anywhere else.
Forward-looking statements are, by their nature, subject to significant risks and uncertainties and are based on internal forecasts and assumptions and should not be relied upon.
Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.