Wall Street Week Ahead: Investors Distrust Washington, Balancing Debt Ceiling and Infrastructure Bill

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A surprisingly hawkish turn by the Fed in June led to a brief sell-off in equities and the fixed income market. (Photo / AP File)

The economic boost from a $ 1,000 billion infrastructure bill expected by the US Senate has helped push Wall Street stocks to record highs, but some investors fear the next two months in Washington are difficult.

The problem is not just the bipartisan infrastructure bill, but the planned spending of $ 3.5 trillion in a Democrat-led reconciliation bill. There is also an upcoming showdown over the debt ceiling, which could lead to a federal government shutdown if an agreement is not reached to increase the borrowing limit by October.

Few people expect the US government to default on its debt and wreak havoc on the $ 22 trillion treasury market. Still, some analysts say a prolonged struggle against the debt ceiling could increase volatility in a US stock market where valuations have become stretched with prices near record highs. Other concerns include an imminent unwinding of the Federal Reserve’s easy-money policies and a resurgence of COVID-19 that threatens to slow growth.

“When I look at Washington, I see a lot of risk,” said Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes.

He said he feared political positions around the debt ceiling would intensify ahead of the 2022 congressional election, and that the reconciliation bill could raise corporate or personal tax rates, weighing on investor sentiment.

As a result, he holds cash in anticipation of a surge in value or cyclical stocks that could drop during a massive sell-off in the market, he said.

Overall, global fund managers increased their cash positions in July from 3.9% to 4.1% of assets while adding shares of large technology companies, according to Bank of America Merrill Lynch. At the same time, options markets indicate that investors see limited gains in the coming months, according to Barclays.

Esty Dwek, head of global market strategy at Natixis Investment Managers Solutions, said she also raised cash to reposition herself for more volatility in the coming months.

“We now have less visibility over the second half of the year” given the emergence of the Delta variant of the coronavirus and the potential for tax hikes as part of a broad reconciliation bill, she said. .

The growing sense of concern comes as investors anticipate possible additional details on plans to withdraw emergency support to the Federal Reserve economy at the annual Jackson Hole central bankers conference.

A surprisingly hawkish turn by the Fed in June led to a brief sell-off in equities and the fixed income market.

Investors will have additional information on the pace of inflation with the release of the Consumer Price Index on Wednesday and the Producer Price Index on Thursday.

Ultra-low interest rates, along with the highest percentage of S&P 500 companies exceeding analysts’ expectations since at least 1994, pushed the S&P 500 up 17.2% for the year to date . The S&P 500 is now trading at 21.7 times expected earnings over the next 12 months, down slightly from 24 times expected earnings at the start of the year, but still well above its historical average.

Senators could vote on the infrastructure bill in the coming days, lawmakers told Reuters.

While the passage of upcoming infrastructure and reconciliation bills will likely strengthen the economy over the next few years, near-term concerns about rising taxes and the debt ceiling could weigh on the S&P 500 in the near future. months ahead, said Jon Adams, senior investment strategist for BMO Global Asset Management.

“There are going to be a lot of details to be worked out that will be watched closely by the markets,” he said. “We expect to see a lot of volatility and posture here over the next few months and we believe it will last until October.”

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