Hillary Clinton and Donald Trump actually agree on something. And it’s likely to lead to a bonanza for the economy and investors. About dam time.
In early August, both the Clinton and Trump campaigns unveiled major policy speeches. While the broad strokes took typical party lines, there was broad agreement on the poor state of U.S. infrastructure – dams, roads, rails, airports and bridges -- and the pressing need to make repair a priority. That, in itself was not the story. Shovel-ready investment has always polled well and politicians love popular things.
The difference last week is Democrats and Republicans seem to agree on how to pay for it: A special one-time corporate tax rate reduction to entice companies to repatriate cash they have been hording offshore. That windfall would fund a massive new investment in roads, bridges, water treatment and power grid infrastructure. It would also create a big list of winning investment themes.
For some time, U.S. corporations have argued tax rates are too high and grossly unfair. Current corporate tax policy places a 35% tax on profits earned anywhere in the world. While corporations get a credit for any foreign tax they might pay, their bill to Uncle Sam is levied only when the profits come home. Citing shareholder responsibility, corporations have been stockpiling cash in tax havens. The nonprofit Citizens for Tax Justice found that more than $2.1 trillion is currently sitting offshore, accounting for $620 billion in unpaid taxes. Apple (AAPL) alone holds more than $181 billion in tax havens. And the list of the biggest debtors is a who’s who of technology and pharmaceutical intellectual property rights holders. Bringing that money home would be beneficial to debtors because it could fund U.S. expansion and even share repurchases. It also help politicians fund spending. That’s why, one way or another, it’s going to happen, and soon.
The obvious winners are construction and heavy industry stocks. Aggregate, crushed stone and concrete stocks Vulcan Materials (VMC) and Martin Marietta Materials (MLM) have been stronger in anticipation of higher public spending. Even smaller regional construction services issues like Simpson Manufacturing (SSD) and Dycom Industries (DY) have performed well. All of these stocks are in the early part of the what is likely to be a long cycle.
The more intriguing infrastructure spending angle is smart cities. Many of the technology firms now hoarding cash offshore are also in the vanguard of that movement. They have a vested interest in shaping tax policy that leads to public investment in sensors, data analytics, broadband and self-driving cars technologies.
Already this is happening. Jacksonville, Fla., is fitting its roads with smart street lights built by General Electric. San Jose, Calif., is merging broadband LTE with lampposts that incorporate smart lights from Philips (PHG) and telecommunication equipment maker LM Ericsson (ERIC). Fremont, Calif., a participant in the Smart City Challenge, will update municipal software APIs to help residents move around the city using public and private mobility services. And this is being duplicated all over the country as cities prepare for connected and self-driving cars. Cisco Systems (CSCO), Oracle (ORCL), Alphabet and others will benefit.
There are some potential roadblocks. In 2009 the Tea Party faction of the Republican Party blocked an infrastructure spending package on the grounds it would add to the deficit. A Clinton presidency may revive similar opposition given the rancor of partisan politics. The difference now is a more receptive public bruised by several years of slow growth, a willing private sector anxious to kick start smarter infrastructure investments – and of course the Tea Party has blown up.
Who would have thought? Something good may finally come from the current bombastic U.S. Presidential cycle. I'll have specific recommendations on these when the time is right.
About Jon Markman: A pioneer in the development of stock-rating systems and screening software, Jon Markman is co-inventor on two Microsoft patents and author of the bestselling books The New Day Trader Advantage, Swing Trading and Online Investing, as well as the annotated edition of Reminiscences of a Stock Operator. He was portfolio manager and senior investment strategist at a multi-strategy hedge fund from 2002 to 2005; managing editor and columnist at CNBC on MSN Money from 1997 to 2002; and an editor, investments columnist and investigative reporter at the Los Angeles Times from 1984 to 1997.
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