Why The Infrastructure Bill Could Be Bad News For The Stock Market

The SPDR S&P 500 ETF Trust SPY and the Global X US Infrastructure Development ETF PAVE both initially traded higher last week after President Joe Biden said “we have a deal” on a bipartisan infrastructure bill worth nearly $1 trillion.

Investors initially assumed more government investment in infrastructure spending would be good news for stocks, but Sevens Report Research’s Tom Essaye said Monday the infrastructure bill would be either good news or bad news for stocks depending on if and under what circumstances it gets passed.

Social Infrastructure: First, there is now a question about whether or not the infrastructure bill will even get passed.

Biden followed up his initial comments by saying he would not sign the bill unless it was accompanied by a “social infrastructure” bill that includes investment in social initiatives, such as free community college and universal pre-kindergarten. Biden has said those programs would be funded largely via tax increases.

It’s unclear at this point whether Biden will attempt to pass the bipartisan physical infrastructure deal and the social infrastructure deal as part of the same package or if they could potentially have enough votes to pass them without Republican support.

Related Link: 3 Upcoming Policy Shifts That Could Impact The Stock Market

Possible Scenarios: Essaye said the best-case scenario for the stock market would likely be for the bipartisan infrastructure bill to pass while the social infrastructure bill does not.

“I say that because the net economic impact would be more stimulus (increase infrastructure spending) but no tax increases,” Essaye said in the email.

The second-best outcome would be for neither bill to pass given that would essentially maintain the status quo.

The worst-case scenario for investors would be that the bipartisan physical infrastructure passes along with the social infrastructure bill, Essaye said.

“From a market standpoint, at this point the risk of an infrastructure bill is greater than the reward, again because any corporate tax increase (or capital gains tax increases) would more than offset any positives from an additional $600 billion in spending over the next few years,” he said.

Benzinga’s Take: For over a year now, almost all of the policy headlines out of Washington have been bullish for the stock market given they have mostly been one stimulus spending program after another.

Biden has been consistent about his desire to raise taxes on corporations, top earners and investors, so investors should be prepared for some potential negative headlines out of Washington as the administration’s attention shifts away from saving the economy from the pandemic and toward funding Biden’s other campaign promises.