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Concerns that infrastructure spending proposals will take a back seat in 2017 are causing a sell-off in stocks such as Cliffs Natural Resources, Freeport McMoRan, and Nucor Corp.
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The conversation in Washington, D.C., is that there's no timeline for President Donald Trump's $1 trillion infrastructure plan, and that's causing infrastructure stocks such as Cliffs Natural Resources (CLF +0.01%), Freeport McMoRan (FCX +0.01%), and Nucor Corporation (NUE +0.00%) to tumble.
On the campaign trail, Trump promised a significant increase in infrastructure spending, but investors are becoming concerned that Trump will fall short in winning support for his plan among budget-conscious Republicans.
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According to the American Society of Engineers, the nation's aging infrastructure requires an expensive face lift. The group grades U.S. infrastructure at a D+, and it estimates that $4.6 trillion (yes, with a "T") is needed over the next 10 years to get our infrastructure where it needs to be.
Trump's spending plan isn't as aggressive as that, but he has advocated for spending $1 trillion over 10 years on roads, bridges, energy, and other infrastructure projects.
Given that his proposal represents the biggest infrastructure program in decades, news of Trump's victory last November sent infrastructure stocks soaring. The Industrial Select SPDR ETF (XLI +0.00%) has gained 13.5% and the VanEck Vectors Steel ETF (SLX +0.01%) has gained 16.5% since Nov. 8.
While those returns are impressive, performance for individual industrial stocks such as Cliffs Natural Resources, Freeport McMoRan, and Nucor have been even better. Between Nov. 8 and Feb. 14, shares nearly doubled in Cliffs Natural Resources, the largest producer of iron ore pellets used in U.S. steel production. Share in Freeport McMoRan, a major copper mining company, and Nucor Corporation, a big steelmaker, soared 31.5% and 23.5% over that period, too.
But growing concern that infrastructure spending won't make it across the legislative finish line has caused the rallies in these companies to hit a rough patch, and all three stocks have tumbled over the past two months. Cliffs Natural Resources, Freeport McMoRan, and Nucor's shares have lost 38.7%, 19%, and 7.7%, respectively, since the middle of February.
Worry over the country's mountain of debt is the biggest obstacle to winning widespread support of a big infrastructure spending plan. The U.S. government's outstanding debt could total $20.1 trillion at the end of fiscal 2017, up from $16 trillion in 2012 and $9 trillion in 2008.
Convincing lawmakers anxious to begin chipping away at that debt won't be easy, especially since the benefits to economic growth from infrastructure projects can take years to realize.
To win support, there's been chatter that Trump might tie infrastructure spending legislation to tax reform, which is generally being viewed as more palatable in Washington right now. However, doing so could create undue risk to getting his tax-cut proposals passed, and that possibility might lead him to decide it's best to tackle these two issues separately.
Infrastructure stock prices soared higher on expectations of a big infrastructure spending plan, so they're likely to remain very volatile until we get insight into how the administration plans to win support.
Although there's a lot of uncertainty associated with Trump's infrastructure plan, investors might not want to avoid the basket altogether. Many of these infrastructure companies curbed supply in response to anemic commodity prices, and that's helped prop up iron ore, copper, and steel market spot prices. Cost-cutting strategies at these companies, including debt reduction, should send more money flowing to the bottom line, too.
Therefore, while pricing has struggled recently, it's generally still above levels from last year, and capitalizing on those higher prices should still support earnings expansion at Cliffs Natural Resources, Freeport McMoRan, and Nucor over the next couple years.
CLF EPS Estimates for 2 Fiscal Years Ahead data by YCharts
Obviously, delivering on earnings expectations depends heavily on seeing prices remain above their 2016 levels, so investors will want to pay close attention to underlying spot prices this year. But overall, while there are short-term policy worries, long-term investors might want to stay the course. After all, infrastructure spending is still on the table, and global economic growth still offers demand tailwinds, regardless of how the debate plays out in Washington.