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Making Lemons

Investment Insights: Market Update
HIGHLIGHTS:
  • Inflation rose 8.5 percent annualized in July, lower than estimates and finally showing a potential peak in the growth of consumer prices.
  • Falling energy costs helped ease inflation in July, although food bills increased despite lower commodity prices.
  • The $739 billion Inflation Reduction Act is expected to pass the House on Friday and be signed into law.
  • The climate bill includes spending for renewable energy initiatives, lower health care costs, corporate tax adjustments, and a historic, roughly $300B payment toward the deficit.

Financial markets extended their recent upward trend today after the release of inflation figures from the US Bureau of Labor Statistics. To the relief of investors, prices rose less than expected as energy costs declined. The Consumer Price Index reflected an 8.5 percent year-over-year increase in July—lower than the 8.7 percent economists predicted. On a month-to-month basis, prices were flat; however, core prices—which exclude volatile food and energy components—gained during the month. Price data may be signaling we have passed the peak of inflation, but it will remain a vital issue. Inflation persistently running at such a high rate can be seen as quite a sour dose of lemons to endure, but, for now, financial markets are celebrating with lemonade.

Lawmakers have also given financial markets something new to digest after the US Senate on Sunday passed a sweeping climate, health care, and tax bill. The Inflation Reduction Act—a $739 billion piece of legislation—is actually a significantly slimmed down version of the original $2.2 trillion Build Back Better Act. While not as impactful as the original version, the new bill includes consumer and business incentives for more climate-friendly choices, spending to combat pollution and emissions, lower health care and drug costs, a few adjustments to corporate taxes, and a historic, roughly $300 billion down payment on the government deficit. The bill is expected to pass the House on Friday and be sent to President Biden to be signed into law.

One sector—clean energy—had been on the rise since talks began on a revised bill and jumped after Senate lawmakers released a draft of the bill in late-July. The S&P Global Clean Energy Index has rallied 16 percent since then on the promise of government investment into renewable energy initiatives. In addition to offering tax credits to incentivize purchases of electric vehicles and solar panels, and other programs, the bill would direct approximately $369 billion toward reducing greenhouse gas emissions and fighting climate change.

However, on the revenue side of the bill, there are a few items that are particularly relevant to Wall Street. First, the measure includes a new 15 percent minimum corporate tax rate on businesses making over $1 billion in net income. This is the main source of revenue for the bill and is expected to generate over $300 billion in tax revenue. Secondly, the measure would levy a new 1 percent excise tax on stock buybacks, which would only generate roughly $74 billion over a decade. Lastly, changes to the 2017 Tax Cuts and Jobs Act would adjust how taxes work for research and development costs, capital expenditures, and interest expense. Combined, these tax measures are a likely—albeit small—headwind for corporate profitability.

Market Dashboard
Financial market data for various time periods covering global asset classes.  Data as of August 9, 2022.  
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Contributors

[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
, CFA
Chief Investment Adviser