Welcome to Thoughts on the Market.
I'm Michael Zizis, Deputy Global Head of Research for Morgan Stanley.
And I'm Mariana Salvatore, Head of Public Policy Research.
Today we're discussing the continued focus on affordability and how to parse signals from the noise on different policy proposals coming out of DC.
It's Wednesday, February 4th at 10 a.m. in New York.
President Trump signed a bill yesterday ending the partial government shutdown that had been in place for the past few days.
But affordability is still in focus.
It's something that our clients have been asking about a lot.
And we might hear more news when the president delivers his State of the Union address on February 24th and possibly delivers his budget proposal, which should be around the same time.
So, needless to say, it's still a topic that investors have been asking us about, and one that we think warrants a little bit more scrutiny.
But maybe, before we get into how to think about these affordability policies, we should hit on what we're seeing as the real pressure points in the debate.
Ariana, you recently did some work with our economists.
What were some of your findings?
So Heather Berger and the rest of our US econ team highlighted three groups in particular that are feeling more of the affordability crunch, so to speak.
That's lower income consumers, younger consumers and renters or recent homebuyers.
Lower income households have experienced persistently higher inflation and, more recently, weaker wage growth.
Younger consumers were hit hardest when inflation peaked and are more exposed to higher borrowing costs.
And lastly, renters and recent buyers are dealing with much higher shelter burdens that aren't fully captured in standard inflation metrics.
Now, the reason I laid all that out is because these are also the cohorts where the president's approval ratings have seen the largest declines.
Right.
And so it makes sense that those are the groups where the administration might be targeting some of these affordability initiatives.
That's right.
But that's not the only variable that they're solving for.
Broadly speaking, we think that the president and Republicans in Congress really need to solve for four things when it comes to affordability policies.
First targeting these quote right cohorts, which are those, as we mentioned, that have either moved furthest away from the president politically or have been the most under pressure.
Second, feasibility.
Right.
So even if Republicans can agree on certain policies, getting them procedurally through Congress can still be a challenge.
Third, timing, just because the legislative calendar is so tight ahead of the November elections.
And fourth, speed of disbursement.
So basically, how long it would take these policies to translate to an uplift for consumers ahead of the elections?
So, thinking through each of these constraints, starting with how easy it might be to actually get some of these policies done, most of the policies that are being proposed on the housing side require congressional approval.
In terms of the cohorts, it seems like these policies are most likely to focus on.
That seems aimed at lower income and younger voters.
And in terms of timing, we know the legislative calendar is tight ahead of the midterms and the policymakers want to pursue things that can be enacted quickly and show up for voters as soon as possible.
So, using that lens, we think the most realistic near-term tools are probably mostly executive actions.
Think agency directives. and potential changes to tariff policy.
If we do see a second reconciliation bill emerge, it will probably move more slowly but likely cover some of those housing-related tax credit changes.
But, of course, not all these policies would move the needle in the same way.
What do we think matters most from a macro perspective?
So what our economists have argued is that the affordability policies being discussed tax credits subsidies, payment pauses they could be meaningful at a micro level for targeted households, but for the most part they don't materially change the macro outlook.
The exception might be tariffs.
That probably has the broadest and most sustained impact on affordability because it directly affects inflation.
Lower tariffs would narrow inflation differentials across cohorts, support real income growth and make it easier for the Fed to cut rates.
Right.
And just to add a finer point on that, I think, directionally speaking, this is where we've seen the administration moving in recent months.
Remember, towards the end of last year the Trump administration placed an exemption on a lot of agricultural imports.
And just the other day we heard news that the trade deal with India was finalized, reducing the overall tariff rate to 18 percent from about 50 percent prior.
Okay, so putting it all together for what investors need to know, we see three key takeaways.
First, even absent new policy, our economists expect some improvement in affordability this year, as inflation decelerates and rate cuts come into view.
And specifically, when we talk about improvements in affordability, what our economists are referring to is income growth consistently outpacing inflation, lowering required monthly payments.
Second, most proposed affordability policies are unlikely to generate the meaningful macro growth impulse, so investors shouldn't overreact to headline announcements.
And third, the cohort divergence matters for equities.
Pressure on lower income and younger consumers helps explain why parts of consumer discretionary have lagged, while higher income exposed segments have remained more resilient.
So If inflation continues to cool, especially via tariff relief, that's what would broaden the consumer recovery and potentially create better returns for some of the sectors in the equity markets that have underperformed.
Right.
And from the policy side, I would say this probably isn't the last time we'll be talking about affordability.
It's politically salient.
The policy responses are likely targeted and incremental, and this should continue to remain a top focus for voters heading into November.
Well, Ariana, thanks for taking the time to talk.
Great speaking with you, Mike.
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