The next driver of economic growth and company fundamentals?
Now that the U.S. presidential election is behind us and a big unknown has become known, stocks are responding favorably. While equities are basking in a bit of short-term certainty following the November 8th election results, key questions remain. One of the most significant relates to future government spending, and specifically, infrastructure. After years of unprecedented monetary accommodation that may have artificially inflated equity prices, increased investments in our nation’s roads, bridges, and airports could provide a significant (and real) boost to corporate earnings and the economy.
Regardless of your presidential preference, both Clinton and Trump promised to increase infrastructure spending on the campaign trail. Hillary planned to spend about $275 billion over five years while Donald claimed he would double her target. Overall U.S. infrastructure recently received a grade of D+ from the American Society of Civil Engineers (ASCE), suggesting this is one instance in which competitive campaign rhetoric may work in our favor.
Most experts agree that the U.S. has underinvested in infrastructure for nearly three decades. As a result, many of our bridges, roads, public buildings, and ports have not had significant upgrades in 50 to 100 years. Government officials are well aware of the problem, but lack of bipartisanship has been a hurdle to distributing needed funds to critical projects. While historically divided government has been more favorable for stocks, in this case, an all-Republican government may enable the passage of much needed infrastructure spending bills.
Research suggests that over the long-term, every $1 spent on infrastructure has the potential to boost economic activity by $3. This is because updated roads, bridges, and buildings improve productivity and drive efficiencies. Increased spending on these projects would also provide new jobs, further benefiting GDP growth.
While most focus on the economic gains, modernizing key infrastructure facilities may have the added benefit of reducing the harmful greenhouse gases that contribute to climate change. According to a report by the Global Commission on the Economy and Climate, more than 60% of the world’s greenhouse gases are associated with old and ailing power plants, roads, buildings, and sanitation facilities, among others.
Finally, increased infrastructure spending may be the balm we need to escape from years of easy monetary policy that has inflated equity prices. Stock valuations are trading above their long-term historical averages despite multiple quarters of weak sales and earnings growth. Now with record-low interest rates poised to go higher and few tools left in the Federal Reserve’s tool box, a shift towards new fiscal policies that increase productivity and encourage corporations to invest – such as infrastructure spending – would provide companies with real sales and earnings drivers. This in turn would help bridge the gap between currently lackluster fundamentals and elevated security prices.
To be sure, there are potential negatives associated with increased fiscal spending, including currently large labor shortages in the construction industry, dependence on prudent government spending, and regulatory red tape. Likewise, increased infrastructure spending could add to an already elevated federal budget deficit. However, taken altogether the positives appear to outweigh the negatives. And new fiscal spending could be just what we need to keep the economy on track while supporting stock prices.