The Vantagepoint Market Perspective: Infrastructure and Assumptions — Texas and Beyond

02/25/2021

 

Infrastructure is the sort of thing that most people take for granted. You just flip a switch or turn a knob and expect your house to light up, your furnace or air conditioner to kick into action, and the water to flow from the tap. And most of the time that’s exactly what happens.

Until it doesn’t.

Texas captured headlines earlier this month as large parts of its power system collapsed during a deadly winter storm, cutting off electricity, heat, and sometimes water for wide swaths of that state’s residents and businesses. Part of the problem reportedly stems from the failure of utilities to winterize their equipment.

Thankfully, power has since been restored to much of the state. But the residual knock-on effects may be more long lasting. In addition to the cost of preparing utilities for frigid weather going forward  — provided that’s the route Texas decides to take — some customers are seeing jaw-dropping increases in their electricity bills. To add to the misery, the utility failures and the corresponding loss of heat caused pipes to freeze and then burst in homes and other structures.   

Wake-Up Call

The Texas situation was a wake-up call to many about what can happen when infrastructure fails and the residual damage it can cause in the weeks or even years that follow, not just in terms of cost, but tragically in terms of lives.

And sadly, those problems are not just limited to utilities in Texas during a freak winter cold snap.

For instance, for several years, there has been talk in Congress and elsewhere about improving the country’s infrastructure – whether it’s our roads and bridges, our electrical grid and broader energy system, or the internet. However, a bi-partisan compromise on legislation that would repair aging roads and bridges, bolster the electrical grid, or secure our internet infrastructure has remained elusive throughout multiple presidential administrations.

COVID-19 Vaccines

Yet the impact of infrastructure extends well beyond areas we might traditionally consider. For instance, the distribution of COVID-19 vaccines has gained prominence in recent months, due not only to a lack of vaccines available, but also to their uneven and sometimes inefficient administration in parts of the country. As a result, the percentage of the population in different states and territories receiving the vaccine has varied widely.

And the longer it takes to get people vaccinated and to establish herd immunity, the longer it will be before the economy can be completely reopened and people and the businesses they frequent can get back to normal.

Delays in the administration of the vaccine have also impacted the reopening of some schools, which in turn has made it difficult for parents who are forced to divide their time between their jobs and overseeing their children’s online at-home and/or sometimes-in-person education. 

Underpinning the Markets

In the markets, the infrastructure impact may not be evident at first glance. On the surface, the stock and bond markets appear to be functioning just fine, with the major stock indexes notching a string of new highs in recent months.

But it’s worth noting the tremendous level of fiscal and monetary support it’s taken to keep the financial pipes open and capital flowing smoothly. Much of the heavy lifting has been done by the Federal Reserve, which has kept interest rates close to zero for nearly a year and has sharply increased its balance sheet and asset purchases in an effort to keep the markets liquid and to bolster the economy.

That support may be invisible to most people, but it’s helped to enable much of the market’s performance over the past year. It’s also prompted traders to move into some of the market’s riskier areas in terms of investments.

Still, it’s worth noting that if there’s a change in the forces backstopping the market’s infrastructure — for instance if the Fed hints that it may nudge interest rates higher or pare its asset purchases — stocks could sharply reverse course.

We’ve been in this delicate situation before. For example, during the 2007-2008 housing crash and the market nosedive that accompanied it, the Fed slashed its benchmark Fed funds rate from 5.25% in September 2007 to between 0% and 0.25% in December 2008.

And then held it at near-zero levels until December 2015, when it began to slowly move rates higher. But even after three years of gradual increases, the Fed was never able to get its benchmark rate above 2.50% and it began cutting rates less than nine months after it hit this level.

Similarly, the federal government has also done its part in an effort to juice the economy and keep the money flowing. Last year’s $2 trillion CARES Act provided emergency relief to individuals, small businesses, states, and many other entities. And as of this writing, Congress and the Biden administration are negotiating another massive stimulus package.

Retirement Infrastructure 

Saving for retirement has also shifted in recent decades from defined-benefit to defined-contribution plans, such as 401(k) in the private sector and 457 in the public sector. In recent years, a number of bills have been introduced, aimed at enhancing the infrastructure that undergirds retirement plans — both in the public and private sectors — and encouraging individuals to save for their retirement. We welcome these efforts and continue to monitor such legislative efforts closely and to keep our participants and plan sponsors informed.

The bottom line is that it’s important to factor in infrastructure when planning for the future — whether it’s utilities, health care, the market, or retirement — and to be prepared, rather than just taking it for granted. As individuals, we should all recognize how much we rely on different infrastructures, even as we hope that most of the time, we can simply assume they’ll work.

For this to happen, we believe that our elected officials should be focused on how to improve the reliability and effectiveness of infrastructure of all types so that all of this country’s various mechanisms, whether physical or financial, can function smoothly for years to come.   

Disclosures:

This information is intended for institutional use only and is not intended for individual investors or the general public. This article includes links to external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Past performance is no guarantee of future results.

When Funds are marketed to institutional clients by our Investment Only (IO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither MissionSquare Retirement nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Investment Only (IO) team, the Funds are offered by MissionSquare Retirement Services,, an SEC registered broker-dealer and FINRA member firm. MissionSquare Retirement Services is a wholly-owned subsidiary of MissionSquare Retirement and is an affiliate of VantageTrust Company, LLC and MissionSquare Investments. Learn more at www.vantagepointfunds.org.