Washington moved to the backseat for investors since the debt ceiling was raised in June. We expect this trend to reverse in the coming weeks. Labor Day will kick off a 15-month sprint toward the US presidential election in November 2024.

The list of moving pieces investors will likely be focused on this September is growing as we believe there is 1) A greater than 50 percent probability of a US government shutdown starting on October 1^st; 2) The Fed’s efforts to rid inflation at the same time rising interest costs increase Treasury supply; 3) Fiscal policy implementation implications (infrastructure, clean energy, Creating Helpful Incentives to Produce Semiconductors (or “CHIPS”); 4) An increasing number of geopolitical events as China tries to create a multipolar world; 5) The possible emergence of a nuclear Iran; and 6) The final three months of campaigning before the primaries begin with the leading Republican candidate holding four indictments and the son of the sitting president facing a possible legal trial.

Publicly traded companies are responding to this increased political risk. A recent US Chamber of Commerce study of S&P 500 companies 10-k risk factors pointed to a 27 percent increase in policy risks over the last decade, with just a four percent increase in economic risks. As such, we have seen companies have been bolstering their lobbying to gather intelligence on how policy changes can help or hurt their businesses and to inform policymakers about the implications of such policy changes.

We believe lobbying is an essential factor for corporate governance that allows companies to understand their risks and opportunities faster than investors do. However, lobbying is not a traditional factor utilized in financial analysis, therefore we believe it creates an underpriced earnings benefit. The Strategas US Large-Cap Policy Opportunities Portfolio aims to capitalize on the potential mispriced earnings benefit, thereby generating alpha that we believe lobbying can produce.

S&P 500 Companies Have Bolstered Their Lobbying Spend This Year In Response To Volatility

US voters have removed the party in power in eight of the past nine midterm and presidential elections. This level of election turnover has not been seen in the US since the 1800s. Our view is that the constant changing of political parties, and the changes in legislative and regulatory priorities that accompany the leadership turnover, have created volatility for corporate America, which may have been a factor leading to companies bolstering their lobbying spending in order to understand, and inform policymakers, on the wide and changing range of policy outcomes. Quarterly lobbying spend has increased for six consecutive quarters and over 40 percent of current S&P 500 companies increased their lobbying spend in the first half of 2023 relative to 2022. 

[1]

Issues that companies are concerned about vary by sector, both for the S&P 500 overall as well as within the US Large-Cap Policy Opportunities Portfolio (the “Portfolio”). The Portfolio’s three largest weights are Industrials, Health Care and Information Technology. The table below looks at the top 10 issues, as measured by percentage of Portfolio holdings within each sector lobbying on the issue, for each sector. While tax and trade are present for all three sectors, they still appear at different levels, along with sector-specific issues such as drug pricing for Health Care.

Policy Uncertainty Took A Break Post-Debt Ceiling, But We Expect A Rebound Post-Labor Day

Policy uncertainty, as measured by policyuncertainty.com, has come down following the debt ceiling resolution. We expect to see uncertainty move higher when Congress returns after August recess and the presidential campaign heats up. Congress will have just weeks to pass legislation to fund the government, otherwise the US will be forced to contend with a government shutdown. Uncertainty will be magnified if the US economy begins to slow at the same time. 

Data as of August 14, 2023

Government Shutdown Is Likely October 1^st, Deal To Re-Open Will Be Important

If Congress does not pass its 12 appropriations bills or a continuing resolution by September 30^th, the end of the 2023 fiscal year, then the government will shut down on October 1^st. We project that a government shutdown is likely and base this on the internal dynamics of the Republican House.

A shutdown can easily be avoided with a temporary extension of current spending levels. But this would also require conservative Republicans to agree to procedural votes and they are unlikely to do so, as they want spending back to 2022 levels and a temporary extension only brings them back to 2023 levels. If policymakers do not pass appropriations or a long-term spending package by year-end, then that triggers a provision in the debt ceiling deal that calls for a 1 percent, across-the-board cut to discretionary spending from current levels. The cut does not actually go into effect until April 30th, buying policymakers additional time.

Our viewpoint is that the set-up today is like 2013 when the government shutdown allowed governing to take hold starting with legislation to re-open the government. The irony is that the shutdown in 2013 led to more government spending, the exact opposite of what conservatives were trying to achieve. Today, the Senate is getting ready to pass bipartisan spending bills and will have the leverage to re-open the government. Ukraine funding may also be added. If a deal to fund the government ultimately results in spending coming in higher, we believe that could be positive for companies levered to federal funding, an area in which the strategy holds significant exposure.

For more information on the Strategas US Large-Cap Policy Opportunities Portfolio, please visit:  U.S. Large-Cap Policy Opportunities Portfolio.  For additional information on Strategas Asset Management, how to access our research or our other investment solutions please visit our website: https://www.strategasasset.com/ or reach out to Patrick Rista, prista@strategasasset.com / (646) 292-7984.

[1] UTL – Utilities, CS – Consumer Staples, COMM – Communications, HC – Healthcare, TECH- Technology, MAT – Materials, CD – Consumer Discretionary, FIN – Financials, IND – Industrials, ENE- Energy

This communication was prepared by Strategas Asset Management, LLC ("we" or "us" or “our”). This communication represents our views as of 08/15/2023, which are subject to change, and are presented for illustrative purposes only. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.

Strategas Asset Management, LLC is an SEC Registered Investment Adviser affiliated with Strategas Securities, LLC, a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser. Both Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with Robert W. Baird & Co. Incorporated ("Baird"), a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser, although the firms conduct separate and distinct businesses.

The S&P 500^® is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The index includes 500 leading companies and covers approximately 80% of available market capitalization.