Peak Manchin And The Return Of The Micro

It’s been all about the macro for quite some time now.

Those who enjoy the tedious task of conducting single-stock analysis or otherwise revel in minutiae with little or no discernible connection to the broader economic environment (let alone the geopolitical landscape) got an unwanted crash course in big-picture thinking in 2020.

There’s nothing like an actual (if fleeting) depression (with a “d”) to broaden your analytical horizons. Throw in a crisis for American democracy and spice the whole toxic brew with an increasingly contentious Sino-US clash, and market participants were left to stare into an existential abyss.

Now, though, it may be time to get back to the micro. Or at least according to Goldman.

“Going forward, key catalysts are likely to be more micro in nature,” the bank said, suggesting that US-based investors are in a position to “move beyond key macro events” like the election, the last virus relief package and what the bank’s David Kostin characterized as “peak economic activity.”

Although the situation in Washington is infinitely more stable than it was during the previous administration, “stable” in that context just means the executive branch — and I’ll put this in strictly factual terms so as not to ruffle any partisan feathers — isn’t run by a former reality TV show host who, at times, openly suggested that being completely unpredictable was a point of pride.

While Trump’s exit removed “tweet risk” and restored a semblance of everyday order, it by no means eliminated policy uncertainty in a more traditional sense. Market participants no longer have to worry about equity futures getting hit in the middle of night because the commander in chief unilaterally decided to announce a trade war escalation via an all-caps social media broadside complete with superfluous punctuation, but the bitter partisan divide remains. While Joe Biden himself doesn’t advocate for a vengeful approach to governing now that Democrats control both chambers, some lawmakers do. And because quite a few of those lawmakers are either i) left-of-Biden on the political spectrum, ii) seen as the future of his party or, in many cases, iii) both, it’s difficult for bipartisan Biden to be… well, to be bipartisan.

So, Joe Manchin or no Joe Manchin, some kind of infrastructure bill will get done. And while the GOP has insisted they’ll fight to the death (not literally, one hopes) to avoid tax hikes, you’d be naive to think they can win that battle. Manchin is most assuredly the linchpin for Democrats right now, but I’d argue he shouldn’t overplay his hand. Let me put it this way: Your children’s children aren’t going to know the name “Joe Manchin.” They will, however, know the name “Alexandria Ocasio-Cortez.” If you don’t agree with that, then allow me to dilute it as follows: It’s far more likely that your grandchildren will, at a minimum, be able to identify AOC as a US politician than they will be able to tell you anything at all about Joe — Manchin, not Biden.

The point is just that we may be approaching “peak Manchin.” The idea that he, and he alone, will decide the future of America’s bridges, roads, broadband, water pipes, airports, R&D, childcare, and community colleges is just about the silliest thing imaginable from a legislative perspective. That’s not lost on Progressives, so paradoxically, Manchin may need to occasionally fold in order to ensure he retains his status as linchpin.

Something like this: “I gave you your multi-trillion dollar infrastructure plan and I even gave you your corporate tax hike, but I’m not giving you XYZ.” That can work. What can’t work is this: “I’m Joe Manchin, and I’m going to stand in the way of every major agenda item because, I’m told, that’s what a ‘Joe Manchin’ does.”

If you’re a market participant, this means you should prepare for at least some dispersion tied to policy uncertainty around the implications of infrastructure, tax hikes and other parts of the Biden agenda.

“Although economic policy uncertainty has declined from a peak of 500 during 2020 to 140 today, it still remains above the long-term average of roughly 100,” Goldman noted, adding that “the details of tax reform will drive wide variation in the size of the hit to company earnings, while only certain companies are likely to be direct beneficiaries of infrastructure spending.”

If, as many expect, input costs continue to rise, that too will necessitate being selective if you’re an active investor. “The effect of rising input costs will vary depending on company margin profiles and ability to pass through costs to end consumers,” Goldman’s Kostin went on to say.

Deciding which sectors and stocks will benefit in an environment characterized by higher taxes and fiscal largesse should be a relatively straightforward exercise. What’s not as simple is determining what stocks and sectors offer the best chance for alpha generation in the same environment. Notwithstanding the names and sectors you’d expect to naturally benefit from the policy backdrop, the question is: What offers “an attractive combination of micro-driven returns and high idiosyncratic risk?,” to use Kostin’s language.

The figure (above), shows Goldman’s “dispersion score.” Without delving into the details of how it’s calculated, the objective is simply to determine which stocks “are more likely to have heightened responses to idiosyncratic, company-specific news,” Goldman explained, adding that the news could be good or bad. Again: What they’re looking for are opportunities to generate alpha in an environment where the micro matters again.

Of course there’s more to dispersion than the return of micro considerations. I’ll get to that later.

Oh, and I suppose this goes without saying, but if benchmarks keep rising inexorably and volatility grinds lower, the above will matter less to everyday investors. Why bother with alpha when you can just ride SPY to the moon?

And if it’s excitement you’re looking for, well… there’s always Bitcoin (and now Coinbase).