Morgan Stanley
  • Thoughts on the Market Podcast
  • Mar 3, 2021

3 Potential Impacts of “Build Back Better”

With Michael Zezas
U.S. Public Policy Research for Investors


Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 3rd, at 11 a.m. in New York.

Markets are paying attention as Congress appears close to completing its work on a COVID relief package. But we think the drama around that event is largely over, and markets will quickly shift focus to the next legislative battle: the Biden administration's proposed ‘Build Back Better’ plan. Expect headlines to start swirling about the proposal, which could include trillions of dollars of spending to address infrastructure and environmental issues, as well as substantial tax increases. Here's what we think investors need to know about its potential impact.

First, expect the bill to take most of the year to be enacted and for its size and makeup to appear to change throughout the negotiation, but when enacted, expect it to be supportive of the ongoing economic recovery and reflation trades in the market. Early templates for the bill suggest spending of at least $1.5T. In our view, that spending will only be partially funded by tax increases, hence adding another dose of fiscal support to the economy. This approach is incentivized by public opinion polls, suggesting voters won't punish Congress for deficit expansion, and a consensus among Democratic leaning economists that deficit expansion should not be a constraint in the near term. This is good news for our economists' view of the ongoing economic recovery, and our Equity Strategy team's view that the stock market's reflation trade should continue to do well - namely industrials, materials and financials.

Second, the bill could set the stage for a super cycle on infrastructure spending, which could support stocks in the steel and cement industries. Our colleagues on the U.S. Construction Sector Research team, together with our AlphaWise team, mapped this out in a recent Insight report, finding about $3T of clearly needed infrastructure repair, including $700B for concrete highways, $1.6T for asphalt roads, and $600B for concrete and steel bridges. This suggests any congressional appropriation of infrastructure money could be quickly put to work.

Finally, expect the legislative process to defer tensions with China. That's not because we expect the U.S. to reach a resolution with China on its various trade policy disagreements. Rather, this Build Back Better plan is part of the Biden administration's attempt to build leverage ahead of engagement with China. In addition to increasing coordination with allies, the Biden administration has been open about its view that domestic investment in economic growth capacity is key to incentivizing China to modify its behaviors so it can sustain engagement with the U.S. economy for its companies. While we still think further tension with China is unavoidable, and would expect nontariff barriers between the countries to continue to rise, the US appears to be taking its time to first build its leverage, and that limits the risk that tensions get in the way of building a sustainable economic recovery this year.

So the bottom line, while the press may focus on the downside impact of higher taxes, stay focused on the big picture: more fiscal support for the economic recovery beyond this year.

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The stage is set for the Biden administration’s major infrastructure and environment initiative. Here's what investors need to know about the road ahead.

In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.

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