The Trump Market Rally: Not Justified By Piddling Infrastructure Stimulus

| About: SPDR Dow (DIA)

Summary

Trump stimulus is $100 billion per year for 10 years.

That's only 0.6% per year of the United States $18 trillion economy.

Total government spending shortfall is around $1 trillion per year or 6% of GDP but the infrastructure annual shortfall is around $50 billion.

Trump stimulus is structured as tax credits to support infrastructure which will mean slow implementation and limited spending due to lack of need.

Some infrastructure needs, such as railroad bottlenecks, will benefit and make specific sectors potential buys.

The stock market (NYSEARCA:SPY) has rallied almost 6% since Trump was elected President and some pundits are warning "Stay out of stocks at your own risk."

The rally is based on the assumption that Trump policies will result in increased growth and/or profits. I'm gonna look at them one at a time in a series of articles. Keep in mind that while individual policies may not move the entire economy, they may benefit specific sectors.

After analyzing each individual policy, I'll attempt to do a Grand Unified Guess (GUG) article on what the net market movement will be over the next 6 months.

First, let's look at Trumps "huge" stimulus plan. This is usually described as $100 billion per year for 10 years.

The only "huge" in this stimulus plan is how much Trump has leveraged this relatively small spending. This is only 6/10 of a percent (0.6%) of the $18 trillion national GDP. Japan spent 1 to 2% of their GDP on infrastructure projects for 20 years and remained stuck in a low growth environment at the zero lower bound (ZLB) of interest rates with minimal or no inflation.

The size of the shortfall in government spending (or what we need to spend to generate normal growth) is around $1 trillion or 6% of GDP, almost all of which is in federal spending as shown in the chart below.

Plotted in billions of dollars is GDP, total government expenditures, and Federal government expenditures. The gold trendlines show that GDP after a recession normally recovers to the previous growth trend but failed to do so after the 2008 recession. It looks like this shortfall is solely due to the shortfalls in government spending as other factors are minor compared to this shortfall. Comparing the federal versus total government spending lines shows that this shortfall was entirely due to federal spending.

Current Gap in Federal Government Spending Click to enlarge

Another problem is that the infrastructure shortfall is only about $50 billion a year with the other $950 billion scattered across all aspect of government. Trump will certainly address shortfalls in military spending but other areas will probably not be supported.

While relatively small, Trump's infrastructure plan is structured with tax credits that should benefit certain industrial shovel ready projects, particularly in the heavy transportation area.

For example, transportation railroads (not passenger) have serious needs for infrastructure that will dramatically increase transportation speeds and profitability. These are well-known (the article above is from 2012) and are shovel ready if regulatory approval can be short-circuited. Warren Buffett knows the profit potential from these which is why he invested heavily in railroads.

Road transportation has relatively few investment opportunities for the tax credit structure because there are relatively few projects that are either shovel ready or improve efficiencies enough to generate incremental profits. Repairing potholes or bridges is not going to dramatically increase transportation efficiencies. An increase in the gasoline tax is needed to access these and should have positive effects on investment returns and the market.

A long shot beneficiary is the St. Lawrence Seaway. The industrial Midwest is not currently served by Panamax container ships, the transportation standard for international trade. The industrial Midwest has some of the best manufacturing capabilities in the world but it's unable to directly access international markets due to the lack of container ship transportation.

Clearly, the success of the Panama Canal indicates that you can have a profitable canal suitable for tax credit based investment. Unfortunately, St. Lawrence Seaway expansion is controlled by the Army Corps of Engineers which doesn't plan to start work until 2030. There will be significant shovel ready investment opportunities if this timing is moved up.

Overall, the planned infrastructure stimulus is too small to be a factor in moving the market. Specific opportunities exist in railroads but are relatively small elsewhere.

However, the Trump plan is a work in process and there are many opportunities that might generate sector opportunites. Investors will have to be very careful in understanding the specifics.

I'll explore tax aspects of the so-far-revealed Trump plan in the next article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.