My video commentary from Wednesday (watch it if you haven’t yet) mostly sums up the message that present circumstances compel me to put forth. So, to end the week, I’ll simply expand on one theme I noted in the video.

I mentioned Wednesday that I’m looking for a pick up in infrastructure investment going forward, and how that inspires me to keep my eye on materials, industrials and technology stocks. Now, before I go on, I want to make clear that I am no advocate for increased government spending , I prefer to see capital remain in the private sector and to allow market forces to more efficiently dictate its use. That said, our nation’s infrastructure, like it or not, is the domain of government — and our commitment to our clients is to allocate their portfolios in a manner that takes full advantage of definable underlying trends (within each’s tolerance for volatility of course). I.e., I may not like that the U.S. budget deficit is likely to get ramped up over the next few years (we’ll hope that sufficient economic activity results to offset), and, to call out another exploitable trend, I may not agree that the European Central Bank and the Bank of Japan (to name two) should continue to pull out all stops to inflate their respective economy’s asset prices, but I absolutely need to accommodate for it all in our clients’ portfolios.

With regard to infrastructure, as you’ve heard on the campaign stump of late, the consensus has it that the U.S. sorely lags the rest of the developed world when it comes to the quality of our roadways, airports, etc. It seems to me that the anxiety is nearing fever pitch, and it’s a pain suffered on both sides of the aisle. That said, official estimates don’t portend an explosion in infrastructure spending, but they do suggest there’ll be enough to move the needle in terms of GDP growth going forward.

And, by the way, particularly when we consider developing economies, this is a global affair.

Here’s Paul da Rita, Director of Global Capital Projects & Infrastructure at PwC, blogging at the World Bank:

A recent report by PwC on the outlook for global infrastructure spending predicts that by 2020, annual global infrastructure spending will reach $5.3 trillion, up from an estimated $4.3 trillion in 2015. This represents a global spending growth of 5% per annum doubling the low rates of growth of just 2% expected this year.

It is also widely acknowledged that a 10% increase in infrastructure investment will result in a 1% increase in GDP. For low and middle income countries, where the World Bank estimates an infrastructure gap of $1 trillion dollars, it is critical for these countries to continue investing in infrastructure as a means to growth. 

I did a little charting yesterday afternoon, looking for correlation between the stock market and government infrastructure investment.  Notice the trend in public construction spending, and the stock market, leading up to the past three recessions. And notice the trend during the present expansion.    click to enlarge…

The question then would be; will the market reestablish its upward trend as governments ramp up infrastructure investment going forward? I suspect that the recent out-performance of related sectors is a sign that traders expect it will. Time will tell.

Have a nice weekend!
Marty