On March 31, 2021, President Biden announced his proposal for a $2.3 trillion infrastructure and jobs plan entitled the American Jobs Plan. Many investors regard this plan with mixed emotions. Although we may benefit from jobs being created and investing in our infrastructure, the sticker shock of a multi-trillion dollar spend has some people concerned about what this could mean for taxes and inflation.
The United States of America is the wealthiest country globally, yet we rank 13 when it comes to the overall quality of our infrastructure. Total public spending on infrastructure as a share of GDP peaked in the late 1950s in the U.S. during the initial stages of construction of the Interstate Highway System. Since the mid-1980s, however, total public spending as a share of GDP has remained relatively flat.
Certainly, infrastructure spending has historically been suitable for markets. Until the great bull market of the aughts, the 1950s was the best decade ever for the Dow, which climbed 239.5% from 1950 to 1959. Low inflation and low interest rates provided an ideal environment in which stocks could thrive. The brand-new interstate highway system helped ship goods from place to place, and the new medium of television helped create an appetite for those goods.
In the United States, about 85-90% of public infrastructure activity is accounted for by state and local governments. The American Jobs Plan consists principally of one-time capital investments in our nation’s productivity and long-term growth. It will invest about 1% of GDP per year over eight years to upgrade America’s infrastructure, revitalize manufacturing, invest in basic research and science, and shore up supply chains. Of course, this could all change once it goes through Congress (On Aug. 10, 2021, it was passed by the Senate. It still has to be passed by the House.)
From an investment standpoint, several points need to be taken into consideration. First, the proposal by the Biden Administration is just that, a proposal. There is a long journey ahead before we know what the final product will be or even get passed. Any comments at this point are pure speculation. Many presidents have had some version of an infrastructure plan – and these plans have largely gone nowhere.
Secondly, the massive stimulus we have observed from both Federal Reserve and Washington, coupled with the proposed stimulus in the form of the “American Jobs Plan,” suggests a reasonable basis for expecting ongoing recovery of the economy as the pandemic subsides, with a potentially healthy pace of economic expansion post-pandemic.
Third, in general, massive spending along the lines of what is proposed could give the markets a boost as surplus liquidity finds its way to riskier assets. This might impact making already expensive assets (stocks, real estate, etc.) even more costly.
Lastly, as factor-based investors, we know factor risk premia ebb and flow over various business and economic cycles. However, recent research suggests that quality tends to do well at the peak of the cycle and continues to do so into a contraction. When the market hits its trough, value, size and momentum tend to be the best performing factors; subsequently, value recedes, but size and momentum continue to do well into an expansion.
Anytime you change taxes and invest in specific industries, there will be winners and losers. Knowing who the winners and losers will be and what this will mean for certain sectors is impossible to determine in advance.
There is not any substantial evidence of a successful methodology to identify and time these cyclical shifts, and the premia associated with various characteristics of factor risk change over time with a degree of unpredictability. We recommend maintaining a strategic allocation across multiple factors to successfully harvest the average risk premia across economic cycles over time in a controlled, cost-effective manner.