As the pandemic picture continues to improve with increased testing and lower infection rates, lawmakers at the federal and state level are contending with the issue of how to ease the economic impact of the Covid-19 pandemic on the American people.
In attempting to climb this wall of worry, our government has entrusted the Fed to work its magic around monetary policy in cutting rates and loosening money supply as aggressively as it can. But with nearly 1 in 4 eligible working Americans filing for unemployment assistance, the question to ask: Is the Federal Reserve tinkering with rates and manipulating the yield curve enough to get our economy back on track or is a much more aggressive fiscal policy approach needed? Put more simply, are we at the cusp of moving away from a Monetarist-Milton Friedman fix to a more Keynesian approach to re-starting our economy? If what the Europeans are seeking to accomplish with their nearly $1tn “EU Recovery Package” announced this week is any sign, it may be time to brush-up on your Keynesian economic view of the world and be prepared for the US to adopt a similar policy which will include large-scale state intervention and a public spending stimulus that we as a nation have not seen since the end of the second World War.
The bold stimulus package put forward by the EU calls for massive infrastructure stimulus, especially for the struggling southern periphery of the Euro-zone. Funds allocated to these countries will be used for upgrading transportation systems, renovating buildings, industrial innovation and several “green” initiatives, according to the contents of the plan. In the US we are already beginning to witness a call-to-arms for similar infrastructure stimulus plans. Last week, New York Governor Cuomo asked lawmakers to allocate more funds to overhaul NY LaGuardia Airport and improve the major railway artery Penn Station in a much quicker fashion. In New Jersey, legislators are requesting a 40% increase in tolls to upgrade the states ailing bridges, roads and tunnels.
In the context of the market, Europe has outperformed US and EM indices by nearly 300bps since the outset of the crisis as the prospect of this vast stimulus plan becomes closer to a reality. This global reflation trade should, in our opinion, usher in a new set of leadership stocks consisting of old economy, value names (industrials, staples, energy and banks for example) as interest in growth stocks begins to fade or at least temper in their popularity. We expect this rotation out of growth into value to pick-up momentum as fiscal policy and substantive government spending takes center stage in kickstarting the US economy.
Please feel free to contact us with any additional questions.
Partner, Portfolio Manager
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