At the end of May 2021, US President Joe Biden released the budget plans for the Fiscal Year 2022. In a statement released by the Office of Management and Budget, Biden said:
“Where we choose to invest speaks to what we value as a Nation. This year’s Budget, the first of my Presidency, is a statement of values that define our Nation at its best.”
The values of the country were reflected in the plan, with Biden’s historic propositions for funding and investing in education, research and public health — to name just a few of the sectors emphasised as contributing towards the country’s strength.
Some of the highlights of the plan were the sections named the ‘American Jobs Plan’ and the ‘American Families Plan’. Alongside proposed changes to taxes in the US, Biden’s budget plans have a strong aim to strengthen the economy and improve the nation’s fiscal health in the long run.
But with the unveiling of a $6 trillion budget proposal by the US president, what does it mean for the financial markets, and for those considering stock or forex trading?
Foreign exchange market
Understandably, the budget plans released by the White House have a huge effect on the nation’s economy, and investors’ speculation on the growth and strength of the country. The budget announcement for 2022 aims to completely renovate the US economy. The federal spending plans to increase, and as a result predictions state that the economy could grow by 5.2% over the next year.
The economy has already improved under Biden’s presidency, which has seen an impact on the value of the US dollar, especially as the nation recovers from the pandemic and as restrictions lift.
However, the costs implied by the budget plans could see deficits for the US at over $1.3 trillion, and debts rising to 117% of the value of the economic output. This could pose a risk to the market, as inflation, taxes and interest rates could rise as a result, and cause US consumer confidence to fall, alongside an increase in public debt.
In the short-term, this hasn’t had a massive impact on the forex market, as the economic circumstances seem positive with the reopening of businesses and successful roll-out of the COVID-19 vaccine. With these factors thrown in the mix, as well as other inflation data, monetary policies, and international trade relationships, there has been plenty of liquidity in the forex market.
Stock market
On immediate reaction, the stock market seemed to experience no impact from the president’s budget announcement, as the S&P 500 continued to rally in an upward trend, gaining 0.3%.
Overall, the general consensus for the global stock markets, was a particular positive one, with the prospect of huge amounts of spending from the Biden government in 2022. According to some financial strategists, the position on stock trading is to remain bullish. This is due to the fact that, through fundamental analysis, the positive factors that would influence the future trends of the market, outweigh that of the negatives.
However, there is the risk posed that in reaction to the huge proposal of government spending, inflation would be forced to rise and the Federal Reserve will have to raise interest rates. This not only could lead to a recession, but could also impact the valuation of stocks.
It’s not just the budget proposal that is causing movement in the market, as the US stock futures fell slightly at the beginning of June 2021, supposedly in preparation for record high levels, amidst optimism for the reopening of the economy.
Stocks in the tech sector, and particularly in the video communications company Zoom, fell around 1% in value. This is likely due to speculation around its drop in usage, as restrictions are lifted, and more of the public will return to work and socialising in person.
In terms of the suggested investments laid out in the president’s budget plan, investors will note in particular, the $800 billion that the government intends to put towards climate change. This includes investment in cleaner and greener energy, which is a continuous factor that could affect the value of stocks in oil and gas companies, as well as the value of the commodity itself. It will certainly be worth watching the value of oil, as the market is already having to recover from the impact of the coronavirus pandemic, and the havoc it reeked on the balance between supply and demand.
Investors should speculate on the future trends of the markets with caution after the announcement of Biden’s budget plans for the year 2022, as currently it can be seen as more of an illustration of the policies that the president wishes to implement. The proposal still has to be passed by Congress. But with the Democrats in control of both chambers, there is a strong chance that Biden’s budget may well be approved.