Analysts Grow Cool on Infrastructure Rally
http://blogs.wsj.com/moneybeat/2016/11/15/planes-trains-and-skepticism-analysts-grow-cool-on-infrastructure-rally/
The sharp rally in infrastructure stocks is drawing skeptics; one bull says gains are ‘long in the tooth’
ENLARGEThe sharp gains in infrastructure stocks have some analysts warning that the rally is a bridge too far.
The Republican sweep of last week’s election has rejuvenated investors’ anticipation for government spending on roads and bridges after President-elect Donald Trump vowed to “rebuild our infrastructure” and “put millions of our people to work as we rebuild it” during his acceptance speech. Shares of companies including Vulcan Materials Co, Jacobs Engineering Group and Martin Marietta Materials are all up at least 12% over the past week.
One former infrastructure bull, Daniel Clifton, Strategas Research Partners’ Washington, D.C. guru, already says the rally looks “long in the tooth.”
Mr. Clifton turned bullish on infrastructure stocks roughly a year ago, as Congress passed a long-term highway spending bill. His firm’s custom-made basket of infrastructure-spending stocks is up about 30% this year. Given the run up, lofty expectations are now priced into the group, Mr. Clifton wrote on Monday. Another reason to temper enthusiasm: Mr. Clifton notes that the odds of Congress approving the proposed $1 trillion in infrastructure spending could overly ambitious considering that the hard-line fiscal conservatives in the House have long opposed increasing the deficit. He puts in this way: “Congressional Republicans are not going to give Trump $1 trillion.”
Most importantly, Mr. Clifton says that President-elect Trump’s infrastructure plan, as written, “has little to do with the actual stocks that are rallying.” As the Wall Street Journal has noted last week, the proposal in its current form relies entirely on private financing. Here’s Mr. Clifton again: “The Trump plan is to give tax credits for purchasing bonds of private infrastructure companies; that infrastructure is very different than highway-related stocks.”
Greg Valliere, chief global strategist at Horizon Investments, writes on Tuesday that an infrastructure bill might not win enactment until the middle of next summer, with little impact before late 2017: “Washington moves slowly on huge projects like this, and there’s a lag time on the economic response.”
RBC Capital Markets’ Deane Dray, an analyst covering industrial companies, another group that has been caught up on the post-election rally, is similarly cautious. The Industrial Select Sector SPDR Fund, ticker XLI, is up 5% over the past week: “Don’t chase the momentum,” he wrote. ” Our take is that the exuberant buying appears to be based on premature conclusions about potential policy shifts and optimism on the timing of the benefits.”
