President Biden is set to announce his potentially $3 trillion stimulus package Wednesday in Pittsburgh.
This is expected to be the the first half of a total of $3 trillion in new spending, with the second half expected to be announced at a later date.
The bill, which is expected to draw from Biden’s Build Back Better campaign platform, is geared towards providing economic relief through increased economic activity via large government contracts for infrastructure related projects.
The two programs, if passed will bing Biden’s total stimulus spending to nearly $5 trillion. These new measures are expected to be funded, at least partially, through tax hikes on two separate groups. Needless to say, the proposals are already being met with fierce opposition.
President Biden signed the last economic stimulus on March 11 with no bipartisan support in the House or Senate. The bill included the promised $1,400 stimulus checks and came with bundles of inflationary fears.
Despite managing to pass the economic stimulus bill through budget reconciliation in a party-line vote at - as far as Congressional speeds go - breakneck speeds, the President will have a lot more work to do if he is to pass the infrastructure bill. Biden’s last bill spent borrowed money, which helped it pass as no one in particular was left to pay the bill.
President Biden’s Build Back Better campaign is - on paper - everything that politicians on both sides of the aisle have wanted for some time: an all-in-all better infrastructure system to help Congress accomplish its responsibility to foster interstate trade, as defined by “The Interstate Commerce Act” of 1887.
The Interstate Commerce act placed the responsibility of railway construction, and later highway and airport systems, onto the federal government’s shoulder, as Congress became responsible for fostering economic growth through trade. This allowed everyone in the country to contribute to the growth of the nation through their taxes.
Who's Paying?
This time around, President Biden will be taking on the most powerful groups in America -- the wealthy and the corporations--to foot the bill. Which he hopes will boost the economy and help the middle class.
Under Biden’s proposal, the first phase, which is physical infrastructure such as roads and bridges, will be financed by increasing the corporate tax rate to 28% (where it was before the Trump tax cuts) from 21%. Meanwhile, the second phase will address human capital - such as universal access to pre-kindergarten education as well as tuition free community colleges - will be footed by higher tax rates (or perhaps, better tax collection efforts if the top tier of tax payers is really hiding 20% of their income.) on the wealthy.
Because of the tax hikes, we can expect Republican support for the bill to be non-existent. This will likely leave Democrats to pass yet another multi-trillion stimulus package through budget reconciliation, rather than with bipartisan support.
This means that the bill will need full support from Democrats in the Senate and a very high level of support in the House. Despite the bill addressing issues that are seen as important by a large number of Americans, in both parties, there are still many issues that separate Democrats from each other on how to proceed with a bill of this magnitude.
While the unprecedented economic downturn is a clear reason to pass a bill, how large a bill and what exactly the bill should target are areas that members of the party can see as vital to the bill's success and could ultimately be the reason it never materializes.
How to Trade It?
Despite the bumpy road ahead, a bill of this size - regardless of the likelihood of it passing - is one that investors should be prepared for with a gameplan. As the bill progresses, its chances of passing - obviously - increase with each step. These steps will be based on your own interpretation of how well the bill is progressing and how likely you think it will be to pass, so remember, if you want to trade Biden’s bill, you will need to be caught up on your homework.
Investors will want to lay out a trading plan for every step of the way. Starting off, investments should find their way into large companies that would classify as "safe money." Companies like Caterpillar (CAT) and Fluor Corporation (FLR) are two giant corporations which should see gains as the economy gets back to normal as the vaccination efforts continue, but will almost certainly catch a piece of any infrastructure spending package, no matter the size.
These big guys have growth in sight at the end of this gloomy, Covid-filled tunnel, so putting some money here should help hedge some of your bets from requiring a controversial bill to get signed.
As the bill checks more boxes for you, and your belief in the bills passing grows, it’s time to add some risk. We know Biden has a commitment to accelerating the United States’ adoption of clean energy, as well as bringing back manufacturing jobs.
So think of Phase 2 as broken into two acts. First, lets dip our toes into some low-risk areas and primarily allocate to value stocks which might, as a result of streamlined supply chain capabilities in the American transportation system, bring back factories and manufacturing plants. This can include your Thor Industries (THO), your Ford Motors (F), and others.
But, lets not ignore some growth opportunities here. Riskier bets will include investments in EV charging companies such as Blink Charging (BLNK), and new-age battery companies like Plug Power (PLUG) which develops hydrogen fuel cells.
If the progress keeps going from here, now is the time where we remind you that markets are forward looking, so let’s get the exit strategy in place. As the bill nears signature, investors will start shifting their profits into new ventures as the prices start looking less and less attractive.
It can be tricky to understand when this is, as different headlines drive different narratives in the market, but you should be prepared to exit - partially or fully - from some of your riskier, and possibly even from your safer holdings before a bill is signed.
Failing to do so could leave you holding the line on an underperforming stock, which, unlike in the cases of the GameStop (GME) mania, likely won’t come with a sense of camaraderie with your fellow investors.
