The U.S. Department of Commerce recently celebrated the one-year anniversary of the CHIPS and Science Act, which was signed into law on August 9, 2022. This federal statute provides nearly $280 billion in new funding and is aimed at boosting domestic research and manufacturing within the semiconductor sector. Additional goals of the statute include increasing onshore manufacturing jobs, bolstering domestic supply chains, and improving the positioning of the United States within the global semiconductor space. Specifically, the CHIPS and Science Act provides over $52 billion for U.S. semiconductor research, development, and workforce enhancement, including $39 billion in manufacturing incentives and $13 billion for research. Also included within the statute is a 25% investment tax credit for capital expenses related to the manufacturing of semiconductors and similar equipment.

U.S. Census Bureau data on private manufacturing construction spending by industry can be analyzed to help determine the effects of the CHIPS and Science Act on business activity. To that point, over the last decade, private manufacturing construction spending in the computer, electronic, and electrical industries (“CEE”) represented less than 15% of total domestic manufacturing construction spending. However, spending on CEE-related manufacturing construction increased significantly within the last 12 months, surging to more than $110 billion at the end of July. This spike in spending represents an increase of roughly 125% over the last year, and CEE expenditures now account for more than 55% of total private manufacturing construction outlays in the United States.

Perhaps unsurprisingly, the return of the S&P 500 Semiconductor & Equipment index is significantly in excess of that of the broader S&P 500 index since the CHIPS and Science Act was passed (53.7% vs. 13.3% for the trailing 12-month period ending July 31). While a portion of this rally can be attributed to optimism surrounding the prospects of artificial intelligence, the increase in manufacturing spending detailed above has also been a material tailwind for semiconductor companies and those in related industries. Additionally, the fact that the statute contained a clause that prevents companies from using taxpayer money to repurchase stock or issue dividend payments suggests that the majority of recent gains within the semiconductor space reflect organic growth. The sector could be poised for continued strong performance given the importance of semiconductors across the globe, however, investors should weigh any potential benefits offered by the space against risks which include increasingly lofty valuations.

With June and the Treasury’s estimated X-date quickly approaching, the debt ceiling issue came to a head over the weekend. While the spending deal reached between President Biden and House Speaker McCarthy still needs to be approved by Congress, it is an important milestone in the U.S. avoiding its first-ever default. While that worst-case scenario would have had catastrophic impacts on the economy, markets — as measured by the CBOE Volatility Index (VIX), known as the fear index — remained relatively calm. The VIX is measured using option activity and gauges the market’s appetite for volatility. Usually, the market and the VIX are negatively correlated, meaning the VIX increases as markets go down. As shown in the above chart, during times of stress, including debt ceiling uncertainty, the VIX tends to be more dynamic, with sharper jumps and falls. With markets having spent the last year heavily focused on inflation, labor markets, and the path of interest rates, which now seem at least near the peak, debt ceiling negotiations were overall taken in stride by equity markets. It is generally accepted that a VIX level above 30 indicates more investor uncertainty, which we have seen reached multiple times over the last few years, though during the month of May, the VIX peaked around 20. As noted, while the House and Senate still need to consider the bill this week, the most likely outcome is the debt ceiling bill is signed into law before the U.S. would have had to default on its debt obligations, removing one more headwind for markets this year.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.