10 Mar 2021 3 min read

The 1.9 trillion dollar question


The S&P 500 index is roughly flat over the past month. Does this imply that not much has changed in that time? Far from it!



Beneath the index surface, equity investors have been busy pricing in a lot more optimism about a major economic rebound in the US. This is not least due to the $1.9 trillion stimulus package coming out of Washington.

The details are by now familiar – direct payments to individuals, aid to local governments, and more – but it is worth taking a step back to look at the wider context for these policies. The Overton window has been opening for such measures for a while, but recent weeks have really emphasised politicians’ willingness to keep the public purse strings loose.

Not so long ago, the annual Conservative Political Action Conference (CPAC) of Republican activists in the US was dominated by ‘Tea Party’ budget hawks. There was no shortage of attacks on President Biden, Democrats and their policies at this year’s iteration, but Donald Trump and others mainly aimed their fire at issues such as immigration and ‘cancel culture’; they showed little appetite for criticising Biden’s fiscal initiatives.

This lack of pushback against government spending runs counter to claims from Republicans like Ted Cruz last autumn that they would become deficit hawks again if Biden won the election. What happened? Generous fiscal support may simply have become too popular to oppose.

Biden’s COVID-19 relief bill is simply one of the most popular pieces of US legislation in recent decades. It has a net approval rating of around +50%, the highest since the 2007 increase in the minimum wage. It’s even backed by a majority of Republican voters. It’s rare to get anything liked so broadly in today’s polarised world.

But it’s not just a US phenomenon. A recent YouGov poll showed a remarkable shift in UK attitudes to benefits. Since 2014, the percentage of the population that thinks benefits are too high or too low has completely switched: 35% of Brits now deem benefits too low and only 15% see them as too high.

The bottom line is that we believe the political path of least resistance is to spend more money.

Cyclically bullish

So what does this mean for stocks? Cyclicals, the most economically sensitive companies, are in our view a much better proxy for equity investors’ optimism on economic growth than the broad indices. While equity markets have seemed to change direction day by day recently, we see the overall trend as being to buy anything cyclical – especially related to re-opening – and fund it by selling tech or anything defensive.

We would expect cyclicals to do well after a recession, and they have outperformed since last spring. Through most of that period, their outperformance has been more or less similar to what happened after other recessions. But over the past few weeks, cyclicals have left all of the precedents far behind. This is now by far their biggest outperformance after a recession and by far their biggest re-rating (versus defensives) after a recession.

At the same time, the macro air may thin for cyclicals over the coming months. Their relative performance typically tracks purchasing-manager index (PMI) momentum quite well, but the recent move has overshot these economic indicators. And with the Institute of Supply Management PMI already above 60, PMI momentum is likely close to peaking.

With the economic acceleration largely still ahead of us, we believe it’s premature to turn bearish on cyclicals today. However, this could become a case of it being better to travel than to arrive.


LGIM contributors