Stocks rallied to cap off a week of bullish moves in equity indexed as fear becomes a thing of the near-past. Latest sentiment numbers show that Americans are, overall, more confident than expected, but mostly about the future.
Spending spree. Ok, let’s start with the disclaimer. You know the rules, policy not politics. Well, we finally got some proposed policy from Pres Candidate Harris in her last Friday’s speech. Let’s dig in a bit using the same lens we used on Donald Trump’s policy proposals a few weeks back.
Let’s go down the list of high-level proposals. 1) Bring back pandemic-era child tax credits. While this will certainly be well received by struggling middle- and lower-income families, there are two costs which must be addressed. First, the actual cost of the incentive, which will add to the deficit. The second will be inflation. More money in the hands of consumers means increased demand which puts upward pressure on prices. We learned this during and right after the pandemic.
VP Harris 2) proposed a $25,000 credit for first-time home buyers. It is true that many younger families are struggling to buy that first home as home prices have skyrocketed. Unfortunately, giving out subsidies will only cause home prices to go higher. We don’t want to tamper with free markets. Lack of demand at these higher prices will ultimately correct themselves. Giving out money will effectively cause first time buyers to simply pay more for homes, BECAUSE THEY CAN. The real challenge in the housing market is low supply of housing. Harris also proposed providing certain 3) tax incentives to builders to spur housing development targeted at first-time buyers. While this would have a financial cost, it would most likely be a more tolerable solution. While we are on the topic of real estate, 4) Harris has also proposed putting a cap on rent increases. This will have a negative impact on the Real Estate sector, particularly on REITS that focus on residential housing.
Earlier in the week, the Vice President pledged to 5) continue the Biden Administrations focus on lowering drug prices. This will have a continued negative impact on the Pharmaceuticals industry which relies on the margins of popular drugs to subsidize R&D for future breakthroughs. Indeed, drug prices are a big challenge to household budgets, and policy focusing on lowering costs would certainly help. On a similar note, Harris proposed 6) rolling back medical debt. Like any debt excused, it comes as a cost to the debt holder. This may have a negative impact on the Healthcare Provider industry. In a similar vein (no pun intended), VP Harris has also pledged to continue to fight for 7) student debt relief which will also come as cost to the Government and ultimately put upward pressure on the deficit.
Finally, we get to the soup and nuts… literally. My regular readers are surely tired of my constant complaining about the high price of groceries. Vice President Harris has proposed to 8) go after grocery price gougers. This will come at a cost to not only the effected sub-industries in the Consumer Discretionary and Consumer Staples sector, but also the producers in the latter and possibly even commodity prices. It’s not good to mess with free markets… UNLESS there is illegal activity.
Now, it may look like I have provided you with only negative side-effects of all these policies principally focused on empowering the middle class for growth. As investors, whether we disagree or agree with policies, we must contemplate adjusting our portfolios to reflect what ultimately may become policy. But here is one thing that is overall positive. Most of these policies would be stimulative to economic growth. More money in the pockets of consumers ultimately means more consumption! And consumption represents how much of US GDP? I won’t answer that because my regulars know the answer. If you are new to the family, it’s 2/3!
So, you can see, as in most cases, any economic concessions, even if they are justly conceived, have costs. This is not limited to Democratic proposals; the same applies to Republican proposals. Sticking to the policies (you know the rule), it is important to know that the would-be winner of the election will pursue their proposed policies, and they may have an impact on your investment decisions, so it is important to scrutinize both sides and plan accordingly. With this latest raft of proposed policies, we can finally start to compare, ECONOMICALLY, one versus the other. Something that I have been complaining about for some time. The Democratic National Convention starts today in Chicago, and no matter who you are planning to vote for, you need to pay attention to any policy proposals, as we are sure to get some of those over the next few days. All in all, Vice President Harris’ proposals appear more center-Democrat-focused than would be expected. Someone needs to remind her and her opponent to be more mindful of the economy. Haven’t you heard? Mindful is the latest trend.
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