Given how much excitement rumors around a Donald Trump-sponsored, $1 trillion infrastructure proposal generated in the market earlier this week, you’d be forgiven for assuming that an even more expensive plan from Democrats would have invigorated traders’ “animal spirits”.
Alas, the unveil of a $1.5 trillion plan that includes funding for roads, transit, schools, housing, bridges, rural broadband and the postal service, was met with yawns on a sleepy day for markets stateside.
The legislation – called the “Moving Forward Act” – addresses public lands, clean energy, health care and water, and will get a vote in the House prior to July 4th. Referencing the cost of the bill, Nancy Pelosi essentially referred questions to Jerome Powell. “With the interest rates where they are now there’s never been a better time for us to go big”, she said. At least Trump and Pelosi can agree on that.
But the market wasn’t in the mood to celebrate literal bridge-building. Not at a time when all figurative bridges to reconciliation between the White House and Trump’s ever expanding list of enemies have been burned.
The president spent a good part of Thursday berating the Supreme Court in a series of inflammatory tweets, including one that accused justices of delivering “shotgun blasts into the face of people that are proud to call themselves Republicans or Conservatives”.
The high court blocked Trump’s attempt to rescind DACA, calling it “arbitrary and capricious”. It was a bitter blow for the White House, and it came just days after the court ruled that federal law protects LGBTQ workers from discrimination on the job.
Trump, already irritated by a barrage of allegations made by John Bolton in a forthcoming memoir, was in no mood for setbacks. I won’t repeat the president’s subsequent tweets, but suffice to say he was simultaneously furious and seemingly excited about the opportunity to use the losses as fuel for a divisive campaign message. That’s about as euphemistic as I can be.
In an interview with The Wall Street Journal, Trump conceded that there is some systemic racism in America, and suggested that his plan to address it goes through the economy. He also said the pandemic is nearly over and rekindled the narrative that China may have wittingly unleashed the virus on the world.
“There’s a chance it was intentional”, he said. Trump also contended that COVID-19 testing is overrated and floated a theory about face coverings being a sign of rebellion against his government. “If we stop testing right now, we’d have very few cases, actually”, the president remarked. He’s right about that.
Meanwhile, hospitalizations in Texas rose again, hitting 2,947. It was the seventh consecutive daily increase, and suggests recent trends are not abating.
Cases in Florida rose 3.9% from the previous day. Arizona reported a record 2,519 new infections. California suffered its largest one-day surge in infections, as cases jumped 4,084. Face masks will be required for citizens outside of their homes. “Simply put, we are seeing too many people with faces uncovered – putting at risk the real progress we have made in fighting the disease”, governor Gavin Newsom chided.
All of this together seemed to weigh on market sentiment during a session when nobody seemed particularly interested in the first place.
Insult to injury (although there was obviously no real-time market impact from this) came from Bridgewater. In a note dated Tuesday and making the rounds Thursday, Ray Dalio’s subordinates warn of a “lost decade” for equities.
They cite familiar risks.
“Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked”, Bridgewater warns.
According to a BofA note from last year, “much of the margin expansion for the S&P 500 non-Financials over the last 1-2 decades has come from globalization, with nearly a quarter coming from a lower effective tax rate and about 50% coming from lower COGS (part of which is due to labor arbitrage)”.
The pandemic will almost surely accelerate the deglobalization push and reinvigorate the kind of fervent nationalism that leads to protectionist trade measures, which in turn put upward pressure on inflation and crimp margins.
“Now the US-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization”, Bridgewater went on to say.
That’s not all bad, but it presages stagnant bottom lines, and, as such, bodes ill for equities.
“Even if overall profits recover, some companies will die or their shares will devalue along the way”, Bridgewater mused. The result: “Left with lower levels of profits and cash shortfalls, companies are likely to come out on the other side of the coronavirus more indebted”.