A couple things that are now NO new news and have hit the inboxes SINCE I’ve cobbled together this weekends observations of global Wall St inboxes. With Sen Mansion’s firm NO vote on Biden BBB, Goldilocks says
BOTTOM LINE: Sen. Joe Manchin (D-W. Va.) announced that he is a “no” on moving forward with President Biden’s Build Back Better (BBB) legislation. BBB enactment had already looked like a close call and in light of Manchin’s comments we are adjusting our forecast to remove the assumption that BBB will become law. While BBB in its current form looks unlikely, there is still a good chance that Congress enacts a much smaller set of fiscal proposals dealing with manufacturing incentives and supply chain issues. There is also still a chance that Congress retroactively extends the expanded child tax credit, with some modifications, though we think the odds of this occurring are less than even. In light of our changed fiscal assumptions, we are lowering our real GDP forecast for 2022: 2% in Q1 (vs. 3% prior), 3% in Q2 (vs. 3.5% prior), and 2.75% in Q3 (vs. 3% prior).
Emphasis mine. The note dives a touch deeper and reminds that
… 4. A failure to pass BBB has negative growth implications. We had already expected a negative fiscal impulse for 2022 as a result of the fading support from COVID-relief legislation enacted in 2020 and 2021, and without BBB enactment, this fiscal impulse will become somewhat more negative than we had expected. Specifically, the expiration of the child tax credit and the lack of the other new spending we had been expecting will reduce the fiscal impulse to growth by around 1pp in Q1, 0.5pp in Q2 and 0.25pp in Q3. With this change, our GDP forecast for 2022 now stands at 2% in Q1 (vs. 3% prior), 3% in Q2 (vs. 3.5% prior) and 2.75% in Q3 (vs. 3% prior).
AND on stocks and profits,
… 6. While the apparent demise of the BBB legislation has negative implications for near-term consumption, for financial markets there are also likely to be some offsetting positive effects. The odds of corporate tax increases have now declined, for example, which our equity strategists had estimated would reduce S&P profits by 3%. And while a failure of the BBB legislation would be a clear setback for the renewable energy sector, it would be a positive for biopharma which would no longer be tapped for more than $100bn in price reductions in the Medicare program.
Speaking of stocks, weekly stock jockey thoughts reminds us how sometimes the best offense is a good defense
Our Fire and Ice narrative for a tightening Fed and decelerating growth is playing out with the Fed taking steps to deal with higher than expected inflation. Meanwhile, Omicron has awakened investors to the risk of slower growth that we think goes well beyond the virus in 1H22—Stay Defensive.
A visual reminder that expensive stocks have been under pressure most of the year
Exhibit 2: Valuations Under Pressure Since Feb
AND a visual of cyclicals/def look vs CURVE
Exhibit 6: Cyclicals/Defensives Still Looks Vulnerable Relative to Yield Curves
All told, MS continues to see an S&P end of 2022 at 4400 (-5.8%) as BASE CASE with range of outcomes being a +7% BULLISH CASE (5000) and a -16.5% bearish case (down TO 3900).
Lot of moving parts this morning as y’all begin a holiday shortened week with NOT MUCH on the econ calendars until Thursday
