On Jan. 29, the day after President Obama delivered the State of the Union address, I wrote about the poor performance of infrastructure stocks and concluded that speculators didn't believe he was going to be successful in getting government funds allocated there, or that he would even really try. Although speculators may have concluded that, events since appear to have changed their minds.
On Feb. 3, the S&P 500 hit a near-term low of 1741, reversed course, and has been heading higher since. On Feb. 6, Vice President Joe Biden, said this during a speech in Philadelphia: "If I blindfolded you and took you to LaGuardia Airport in New York, you'd think, "I must be in some third-world country."
On Feb. 11, the U.S. House of Representatives, agreed to suspend the federal debt ceiling without restrictions, until March of 2015. And the next day the U.S. Senate did the same. Two weeks after that, U.S. Defense Secretary Chuck Hagel, announced plans to cut military spending.
As a result, speculators and investors, appear to believe that the chances of federal spending on domestic infrastructure have increased quite substantially from what they were expected to be when the State of the Union address was delivered.
All of the infrastructure stocks I had mentioned in that column have performed well over the past month. Caterpillar (CAT) is up 7%, General Electric (GE) is up 1%, Chicago Bridge & Iron Company N.V. (CB) is up 11%, Jacobs Engineering Group (JEC) is sideways, Fluor (FLR) is up 1%, and Granite Construction (GVA) is up 13%. Although not mentioned in that original column, Foster Wheeler (FWLT) is up 8% and 3M (MMM) is up 4%.
Regardless of the performance of these stocks over the past month, this is still a dicey play for investors. Even though infrastructure work and the jobs it would produce are needed, that has been the case since before President Obama was elected to his first term and nothing has yet been accomplished on this front.
The political advantage and inertia is with the president right now, but an infrastructure spending program must pass the Republican controlled House of Representatives -- either as a stand-alone program or as part of the president's 2015 budget.
But there is a more immediate concern that should give investors pause before jumping into the infrastructure stocks now. The Department of Transportation's Highway Trust Fund traditionally funds transportation infrastructure programs. However, the fund is expected to become insolvent as early as this coming fall, before the end of the current fiscal year, and probably before the Federal Budget for 2015 is approved.
Gasoline taxes fund the Highway Trust, which was created in 1932. The current rate of 18.4 cents per gallon of gasoline has been unchanged since 1993 when then President Bill Clinton increased it by 4.3 cents. President Obama does not want to increase this tax and instead is proposing a refunding of the Highway Trust by changing the corporate tax code. The Republicans are countering with proposals to reform the way the Highway Trust Fund operates and to change the individual income tax code.
This means that individual and corporate tax rates will come down, especially on the high end, but also that many existing deductions will be terminated. The big political mine fields include the Republican proposals to reduce the mortgage interest tax deduction and eliminate the preferential treatment of investment income. At this juncture, it seems that the fight over the federal budget is going to be centered on domestic spending issues and how to pay for them, with transportation infrastructure being the centerpiece around which negotiations pivot.
Although the trajectory toward an infrastructure program is more positive now than it was a month ago, if Russia decides to divide Ukraine in half along the Dnieper River, or China and Japan have a military confrontation over the Senkaku/Diaoyu Islands, domestic spending will once again take a back seat to the military.
For now, investors would be wise to watch all of these issues play out but resist taking a position in the infrastructure stocks yet.