Last week, the Senate passed an infrastructure bill that promises to spend an incremental $550 billion on things like roads and bridges ($110B) and railways ($66B), plus power and water ($120B). While the approved version is much smaller than the original $2.6 trillion proposed — and the final bill still has to pass the House — it represents a key piece of legislation that garnered support from both sides of the aisle. For that we should be celebrating.
What does this development mean for the markets?
Keep an eye on iShares US Infrastructure ETF (IFRA) for a sense of how the market is pricing in this new spending. The ETF is made up largely of shares of Utilities, Industrials and Materials companies. While it is up more than 20% year to date, it has lagged the S&P 500 slightly, suggesting that this new spending hasn’t greatly altered the market’s outlook.
But how are we going to pay for this new spending?
While many headlines have questioned how the bill will be paid for, it appears that the outlays will only impact the budget deficit on the margin. The largest impact on spending won’t hit until 2025. And even then, according to Congressional Budget Office estimates, the incremental annual spend will only equal about 0.24% of GDP.
Are there other trends to watch?
In short, yes: turmoil in China and the after-effects of the Covid pandemic. Companies are looking to reinvest within U.S. borders in order to move their supply chains closer to home and avoid some of the political crackdown in China. These moves could end up driving infrastructure-related spending more than any direct spending from Washington. It’s worth noting that:
• Capex plans are increasing
• Manufacturing job openings are soaring
• With very strong earnings and cash flow generation, companies have dry powder to reinvest in their businesses
As someone who has spent more hours than I can count waiting for a delayed New York City subway car to arrive, I am cheering for the new legislation. But for the bill’s direct impact on the markets and the economy, as my kids would say, it’s a solid “meh.”
Kestra Investment Management shares Markets in a Minute every other week to help you stay on top of the latest market trends.
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