August 5, 2022,
Psst.....July was a very good month!
We understand if you did not notice the strong upturn in July, considering the still painful carnage of 2022 overall. The S&P 500 was up 9% for the month. It was encouraging to see buyers active for the first time in a while, and we hope this optimism will help establish a new floor under stock prices going into the fall. We say this in the same hushed tones one would discuss a no-hitter at the end of the eighth inning… it’s far too early to call this game over, and we do not want to jinx it.
There has been a lot of news this week, so a quick update is in order.
It looks like we will get a version of Build Back Better (now renamed “Inflation Reduction Act”). The latest legislation extends the higher ACA (Affordable Care Act/Obamacare) subsides for two more years, provides funding and tax incentives for the clean energy industry (and some assistance for domestic traditional energy sources), and allows Medicare to negotiate drug prices beginning in 2026. The funding for these initiatives will come from a new 15% minimum corporate tax and a 1% tax on stock buybacks. The earlier proposal that required a longer term for favorable tax treatment of carried interest has been cut, and today’s edits will allow an exception on the 15% minimum tax for companies that are making significant new investments in plant and equipment. We view that last change as a positive; penalizing capital investment would have slowed economic development. In a nutshell, this bill is a boost for clean energy, traditional energy (to a much lesser degree) and managed healthcare companies. It is negative for pharmaceutical firms and companies with large stock buyback plans (many large tech names). The new taxes are expected to trim about 3% from 2023 S&P 500 earnings. Debate on the bill will continue through the weekend, so this is not finalized.
The CHIPS Bill has passed Congress. This will provide $280 billion in funding for the U.S. semiconductor industry. As you know, the shortage of semiconductor chips has wreaked havoc on the manufacturing and supply of cars, phones, computers, medical and defense equipment, and more over the past couple years. Geopolitical tensions increase the risk of semiconductor supplies. This bill will subsidize domestic manufacturing facilities, research, and infrastructure to rapidly grow U.S. production of these key items. This is bullish for domestic technology companies and the many industries that rely on this supply.
Unemployment is a big focus today, following the July report this morning. The unemployment rate dropped to 3.5% and wages increased 5.2% year-over-year. The most compelling part of the report to us, however, was the further decline in the Labor Force Participation rate to 62.1%. We would have expected to see this rate tick up as inflation and declining savings drew more people back to the workforce, but instead we see another month of Americans choosing to leave employment. The combination of all the data in this report will keep the Federal Reserve vigilant on inflation through continued interest rate increases and decreases in their bond holdings, an incremental negative for the stock market.