The stock market is feeling the effects of more government spending.
In a note to clients on Monday, Daniel Clifton and the team at Strategas Research Partners note that an index of stocks which typically outperform when government spending is stimulative to the economy have been quietly outperforming the market.
Stocks that make up the firm’s fiscal policy index are a mix of your typical government contractors — defence and IT stocks — as well as healthcare and pharmaceuticals.
This outperformance comes on the heels of last year’s budget agreement, which for the first time in years would see the federal budget not serve as a drag on GDP.
Clifton and the team also highlight commentary from Carl Icahn and others who have begun to, “fret about the lack of fiscal policy and to imply that there is too much dependence on monetary policy.”
The prevailing narrative out of these corners has been that the government needs to use record-low interest rates to do more borrowing and more spending — particularly on the infrastructure front.
Markets, however, seem to at least in part disagree and have rewarded companies feeling the positive impacts of the most recent budget.
And over the last several quarters, government contributions to GDP have been steadily on the rise.
The presidential election looks like it will come down to a general election matchup between Hillary Clinton — a Democrat who would likely support increased fiscal stimulus — and Donald Trump, a Republican who has managed to catch the eye of a former Fed official who thinks his fiscal policy could ultimately be stimulative, markets could be in for even more help from the government.
Though of course when it comes to Trump, who knows what would actually happen.
But as the current monetary policy cycle of low rates and big asset purchases continues to meet an ever more sceptical market, government spending seems poised to step up.
And the market is taking notice.