There is gathering steam behind the US economic engine, CLSA’s Christopher Wood notes in a January 25 report. As President Trump heads to Davos on a sales mission to pitch American business, and he and Treasury Secretary Steve Mnuchin apparently disagree on the desired value of the US dollar, another domestic issue lingers. Tax reform has put major wind in the sails of the stock market, but there is more than can and should be done, particularly with infrastructure.
Infrastructure spending talk gaining steam, may be priced into market to certain extent
“There is no doubt that the gathering optimism on US growth, and the related rekindling of “animal spirits,” Wood wrote. “Still if tax reform has provided a cyclical catalyst to this eight-and-a-half year old recovery, it is possible that Trumponomics provides another lift next year. That is if Donald Trump revives his infrastructure agenda.”
When President Trump was candidate Trump, the notion of a quick bi-partisan infrastructure spending bill was the wild talk. Eyes were on Martin Marietta at the time, as ValueWalk had pointed out.
After initially popping higher after the Trump election became reality, the stock calmed down and traded mostly in a range for 2017 as infrastructure dreams fell down the to-do list with revising Obamacare being given top billing.
But recently the stock price started showing signs of life, moving from near $204 on December 15 to trade at $238 today, amid increasing talk that Trump might try to parlay his tax reform success by doubling down on the economic gas pedal with infrastructure.
Wood, for his part, notes the growing chorus of momentum behind some sort of potential infrastructure program to gain steam. Looking past Davos, Wood is particularly keeping a close eye on the State of the Union Address on January 30 for clues.
“Accelerating noise on the Trump administration’s infrastructure agenda should now be expected in the run up to the mid-term Congressional elections in November,” Wood noted, making this a campaign issue that could appeal to voters from both parties.
What will it do for stocks? Some of the hope and hype may already be priced in.
“The US stock market appears to be discounting such an infrastructure package,” he observed, and then pointed to an economic oddity.
With a mound of economic accomplishments from tax reform and now infrastructure spending, are their concerns regarding inflation – particularly as the US dollar has been weakening. With all this inflationary pressure, where is the inflation?
Why aren't wages growing aside from anecdotal reports?
The rekindling of “animal spirits” is a two-sided coin and “the prevailing investor sentiment though the implications are not all bullish,” with inflation a key concern among many. But if inflation is a concern, where is wage growth?
With the economic engines running at full steam, one would expect wages to be growing, but that's not happening -- at least not yet.
With all the hoopla over tax reform helping the middle class and wages, much of it could be temporary. Wood “remains fundamentally skeptical of the hopes for accelerating wage growth undoubtedly raised by the recent series of announcements by American companies, most of whom announced tax reform-related one-off bonuses for employees rather than increases in base salaries,” wrote the man who saw the potential in Trump before his election. Much like the tax benefits for corporations are permanent and cuts for taxpayers are temporary, so too are much of the wage increases currently being rolled out in the form of one-time bonuses.
This reminds Wood of a trend in Japan to give employees increased bonuses rather than more permanent and hard to claw back salary increases.
Is it technology that is keeping wages low amid signs that inflation should be all around us?
“Expectations of rising wage pressures remain for now more of a hope than a reality in most of the G7 world amidst the looming related threats to employment posed by artificial intelligence and automation,” he noted.
