Current Market Situation
With hopes of economies reopening and government borrowing higher than ever, the attention has shifted to what type of stocks will benefit from relatively high inflation and increasing bond yields. Historically, value and growth stocks struggle when markets view financial instruments as high risk. Commodity stocks benefit as they act as a hedge against inflation. Policy efforts which tend to follow on periods of uncertainty also benefit commodity stocks as the demand for metals increases mostly due to governments focusing on infrastructure to stimulate the economy.
Apart from regular spending centred around direct payments such as the stimulus package just passed in Congress, Joe Biden’s administration is relying on an ambitious $3 trillion infrastructure spending plan to prop up the economy. Placing funds into utilities, telecommunications, roads, and other infrastructure will increase the demand for metals which will benefit public companies selling steel. This will provide extra revenue as these firms will be hired to help provide materials and run projects which will increase shareholder value. Bright prospects for higher earnings and rising bond yields caused by inflationary pressures caused by spending and borrowing provides the perfect synergy for share price appreciation.
How have Steel Stocks reacted to Political Movements?
The chart above depicts movements of Steel Dynamics (NASDAQ: STLD) in blue and U.S Steel (NYSE: X) in orange. Both have reacted positively to any news relating to the Biden Administration. As plans gain traction, these stocks will only go up in value as they will certainly have more demand for their products and services. In the short term, as the plan is debated and passed in Congress, investors will see fluctuations in the price of stock price but due to a Democratic Majority in the House of Representatives and Senate, it will only result in stock price increases as the ambitious plans should be able to pass and become law.
Steel stocks look set to rise due to political trends and historical trends if efficient market theory is to be disregarded. Commodity stocks in general will benefit from excessive borrowing and the focus among investors could possibly shift from growth and investing stocks prevalent during the pandemic to metal stocks such as Steel Dynamics and U.S Steel. I believe, steel rocks present great opportunity and could achieve record highs.