New highs on the S&P 500 Index this week gave the bulls more ammunition to forge ahead. Leading the charge were clean energy, infrastructure and technology stocks. Is this the start of another leg up for the equity averages?
Credit for the advance, in my opinion, was the increase in the rate of U.S. vaccinations (despite the uptick in coronavirus cases over the last week). Second were the actions of the Biden administration in moving rapidly to tackle the needs of the U.S. economy. Possibly even more important, at least in the long term, were their proposed efforts to address the dangerous widening of the income inequality gap in this country.
As readers are aware, the gap in income inequality has been growing in this country for three decades. The ongoing pandemic has only accelerated this problem. After years of politicians and economists arguing that “trickle down” economics would narrow this gap, the opposite has occurred.
President Joe Biden has decided to try another approach. He is committing the largest spending program since Roosevelt’s New Deal to narrow the income inequality gap between the haves and have-nots. His latest $2.25 trillion proposal, announced this week in Pittsburgh, was focused on dealing with the deteriorating state of the nation’s infrastructure. But, it also included a $400 billion program to care for elderly and disabled Americans, and $300 billion that would be directed into building and retrofitting affordable housing. These are areas where the income gap has caused enormous pain and suffering in many Americans.
Those who still insist on the bankrupt theory of private-sector solutions to all our economic issues argue that there is little return on investment in programs like that. It is the kind of thinking that has divided this nation and alienated at least half our population. Whether you are Republican or Democrat, a Donald Trump hater or lover, income inequality affects all of us. Income inequality is colorblind as well. My belief is that it is time to try something different, and the markets seem to agree with my assessment.
Despite Biden’s plan to raise taxes on corporations and those earning $400,000 in income, the markets continue to rally. This has surprised the bears, as well as many politicians. They trot out the same old tired arguments, warning that raising taxes in a weak economy will crater the economy. Historically, the threat of higher taxes usually resulted in a short-term decline in equity markets, but not this time. Why?
My explanation for this week’s leap higher in the markets is simple. Most of corporate america (and Wall Street) recognize the long-term jeopardy of the continued widening of the income gap on their own businesses. Remember, consumer spending comprises almost 70 percent of the economy overall. The less money that consumers have, the less they spend. The less spending, the lower the economic growth rate.
This week, the market’s gains were fueled by a comeback in technology stocks, led by the semiconductor and clean energy sectors. It was a welcome development for the bulls. Friday’s labor report also held good news. U.S. job growth in March showed that 916,000 jobs were added in the economy, while the unemployment rate dropped to 6 percent.
Now that March’s volatility is winding down, and the end of quarter rebalancing is over, I am hoping for a better April into May for investors. Those who had raised some cash in February had some great opportunities to buy back stocks last month. I expect markets to continue higher, but rotation between various sectors will also keep markets somewhat volatile.
A word of warning, however.
Investors should not expect that Biden’s infrastructure proposal will pass in its present form. Its passage will require a great deal of negotiations and time. I’m thinking legislation won’t be passed until October, with the price tag reduced to something below $2 trillion over 10 years.
Remember, too, that, in the past, infrastructure bills have failed to pass more times than not. Hopefully, in the end, something meaningful will actually get done, so, keep your fingers crossed.