by Paul Hoffmeister, Chief Economist
Virginia’s gubernatorial contest last week forced a House vote on the bipartisan infrastructure bill.
Democratic Congressional leadership aims to vote on the $1.75 trillion Build Back Better legislation later this month. Its passage remains highly uncertain, given the current political climate.
Fed Outlook remains supportive to equities.
Arguably the biggest macro news in the United States recently was the surprise upset last week in Virginia’s gubernatorial race, as Republican Glenn Youngkin beat former governor and Democratic National Committee Chairman Terry McAuliffe. Given the fact that President Biden won the state by nearly 10 percentage points just a year ago, the election results imply a major repudiation of the Democratic policy trajectory of 2021.
Youngkin opposed vaccine mandates while personally supporting the vaccine and advocated a range of tax cuts including a doubling of the state’s income tax deduction, eliminating a 2.5% grocery tax, and suspending a recent gas tax increase. But it may have been McAuliffe’s position on education that put Youngkin over the top.
McAuliffe said in a debate on September 28 in reference to the state’s largest school district removing two books from its libraries: “I’m not going to let parents come into schools and take books out and make their own decision… I don’t think parents should be telling schools what they should teach.” Youngkin’s response was, “We watched parents so upset that there was such sexually explicit material in the library they had never seen. It was shocking… I believe parents should be in charge of their kids’ education.” And, for the next month, McAuliffe seemingly refused to back away from his position.
Before that debate, Youngkin’s odds of winning the race according to Predictit was between 20-25%. By election day, it was 50%... He ultimately won by 2 percentage points.
The events in Virginia, along with a much closer than expected gubernatorial race in New Jersey, confirmed the political headwinds facing Democrats one year into the Biden Administration and their Congressional majority. According to FiveThirtyEight, the President’s approval rating has fallen from nearly 53% on Inauguration Day to 43% today.
Last week’s election results quickly changed the legislative landscape in Washington, as the bipartisan infrastructure bill was finally put to a vote in the House last Friday. It passed the House 228-206, with 13 Republicans crossing the aisle. The legislation passed the Senate in August 69-30.
Congressional Democrats now have their sights set on passing President Biden’s $1.75 trillion Build Back Better legislation. Their goal is to vote on it during the week of November 15. That bill seeks to install a 15% minimum corporate tax rate and a surtax on individuals in the highest income tax bracket, as well increase funding for the IRS. Passage of the bill remains highly uncertain. Democratic moderates, Joe Manchin and Kyrsten Sinema, have been the key roadblocks for many months, and the recent political signals by voters may only reinforce their recalcitrance, rather than persuade them to compromise with the rest of their caucus.
For his part, Manchin called the Virginia results as a “wake up call for all of us.” Let’s not forget that Manchin represents West Virginia, where nearly 69% of its voters chose Donald Trump in 2020.
Fed Policy: In his press conference last Wednesday, Fed Chairman Jerome Powell telegraphed that the Fed will begin reducing its bond purchases, but he did not give a definitive date for when the central bank will begin raising interest rates. With statistical inflation stubbornly high (CPI recently rose 5.4% year-over-year, according to the Bureau of Labor), the threat to equities would have been a nod from Powell that Fed policymakers were going to soon raise rates to slow the economy in order to temper those price pressures.
Also, to us, it seemed that the Fed left the door open to pausing or even reversing the taper. This could be a nod to financial markets that the Fed will try to avoid spooking markets and will reverse course if asset prices significantly weaken. If this is an accurate interpretation, then it may be that Jerome Powell’s Fed is installing a Fed put under equity prices.
For now, the outlook appears to be that the Fed will maintain low rates, allowing the economy to grow even more and unemployment to fall even lower. Currently, the official US unemployment rate is approximately 5.1%; it stood at 3.8% before the Covid shutdowns. Long-term bonds benefited from the Fed news. The US 10-year yield has fallen to nearly 1.45%, compared to 1.60% prior to the meeting. Meanwhile, the S&P 500 continues to break new highs.
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Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of the Camelot Event-Driven Fund (tickers: EVDIX, EVDAX).
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