Company / Analytics

Analytics, 28 May 2021

What President Biden’s Budget Means for the market

President Joe Biden is expected to unveil his first full budget proposal for the fiscal year 2022. A skinny version of the budget was released in April this year, and it proposes to increase federal spending to $6 trillion, with annual deficits of more than $1.3 trillion over the next decade.

Investors are pouring money into the areas of the stock market that would benefit most from President Biden’s $2.25 trillion infrastructure package.

Priorities of the budget

President Biden’s first budget request will likely reflect many of the priorities he outlined on the campaign trail and in his two proposals to spend more than $4 trillion on infrastructure and social programs. The White House has said its proposal would increase spending on domestic programs, including education, scientific research, and combating climate change. Officials said the goal is to make what they called long-overdue investments in core public services and agencies, such as the Centers for Disease Control and Prevention and the Environmental Protection Agency.

What it means for the markets

Investors are pouring money into the areas of the stock market that would benefit most from President Biden’s $2.25 trillion infrastructure package. The industrial and materials sectors were the only two within the S&P 500 to see inflows last week, according to Bank of America. Materials saw $78 million of inflows and industrials had $19 million of inflows while the benchmark S&P 500 saw more than $400 million of outflows.

Analysts at Bank of America expected both [industrial and materials] to benefit from a pick-up in ‘picks & shovels’ capex — with room for inflows to continue after cumulative outflows in both sectors in 1Q and 2020. Additional inflows into the two sectors could further bolster what has been a strong start to 2021. Industrials have gained 13% this year, tied for third among S&P 500 sectors. Materials, meanwhile, are up 11% and are the fifth-best performing sector. The S&P 500 as a whole had gained 8.55%. Biden’s proposal, dubbed the American Jobs Plan, would direct about $115 billion to modernize bridges, highways, roads, and other main streets that are in most need of repair. Biden proposes to pay for the outlays by raising the top corporate tax rate to 28% from 21% in addition to increasing the global minimum tax on U.S. companies to 21% from around 13%. President Trump’s Tax Cuts and Jobs Act of 2017 lowered the top corporate tax rate to 21% from 35%, which was among the highest in the world.

US Treasury yields rose on Thursday on reports that the budget will be announced on Friday. Investors also sold Treasuries ahead of the government’s sale of $62 billion in 7-year notes later on Thursday. Investors also sold Treasuries ahead of the government’s sale of $62 billion in 7-year notes later on Thursday. Bond dealers tend to sell Treasuries ahead of an auction to push yields higher so they can buy them at a lower price in a move called supply concession. The report weighed on Treasury prices because it means the government would have to flood the market with more debt to finance the budget.

The Budget Proposal

The president’s budget proposal serves as a fiscal blueprint for the administration’s policy priorities and signals to Congress what the White House hopes to accomplish over the coming years. It also provides a detailed look at how the president’s spending and revenue proposals would affect federal deficits and debt. It includes the administration’s assumptions about how those policies would affect economic growth, inflation, and interest rates.

Some years, lawmakers skip trying to pass a budget entirely and just move straight to the spending bills needed to fund the government. But this year, Democrats might try to pass legislation under a process tied to the budget known as reconciliation. If Democrats in the House and Senate can pass an identical budget, then they can pass legislation with a meaningful connection to the budget with a simple majority in the Senate, rather than the 60 votes most bills need. That means they can pass legislation without GOP support in the Senate – as they did with the $1.9 trillion Covid relief package passed in March, which was tied to the fiscal year 2021 budget.

Mr. Biden hopes to get GOP support for an infrastructure bill, but if the two sides can’t reach a deal, Democrats might try to pass a sweeping infrastructure, child-care, and education package using this process. But none of it is possible if they can’t agree first on a budget.

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