UBS's senior Portfolio manager explains why markets aren't tumbling

UBS Managing Director and Senior Portfolio Manager Jason Katz explained why he believes markets weren't tumbling on Monday after the Senate passed the Democrats' social spending and taxation bill after a marathon vote-a-rama session that lasted more than 15 hours.

The bill's passage is the culmination of more than a year of intra-party negotiations among Democrats trying to pass a party-line bill. They used a process called budget reconciliation that allows them to get around the Senate filibuster to move forward.

Despite the bill's passage, which includes more than $400 billion in spending and more than $700 billion in taxes, U.S. stocks moved higher on Monday morning.

Katz said that markets are really absorbing the job numbers in terms of how the Fed might react to it, and he believes that it is a good news. He said that a crash landing may be avoided, as the runway for a soft landing may have shortened. On Friday it was revealed that U.S. job growth unexpectedly increased in July, defying fears of a slowdown in hiring even as the labor market confronts the twin threats of scorching inflation and rising interest rates.

The Labor Department said in its monthly payroll report released Friday that 528,000 jobs were added in July, surpassing the 250,000 jobs forecast by Refinitiv economists. The unemployment rate was down to 3.5%, the lowest level since the COVID-19 epidemic began more than two years ago.

The Fed will take aggressive action to try and curb inflation, which remains at four-decade highs, according to the data released in June of last month, which has reduced investor appetite to hold assets perceived as higher risk, according to the data released by the Fed for June.

The U.S. economy has experienced two consecutive quarters of negative GDP last month, which is the technical definition of a recession.

The Federal ReserveFederal Reserve has been moving to tighten policy at the fastest pace in three decades. In both June and July, policymakers approved a 75 basis point rate increase. Markets experienced turbulence in the first half of the year as investors ingested economic data and priced in several rate hikes by the Federal ReserveFederal Reserve as the central bank tried to curb persistent inflation.

Katz said on Monday that markets aren't over reacting, given there is a perception that this spending bill is not as burdensome as Build Back Better. The minimum corporate tax rate of 15% isn't the 28% we all feared when the Democrats took control, he said.

Democrats tried to get a bill called Build Back Better worth more than $3 trillion last year. The bill, called the Inflation Reduction Act, has been scaled back from that.

Katz said that the bill doesn't present a change to carry interest, but there are people who believe that will motivate private equity funds to deploy capital and the economy. The portfolio manager pointed out that the bill includes a 1% tax on corporate buybacks for most publicly listed companies.

There are those who argue it doesn't have a material impact on corporate earnings, he told host Stuart Varney. One of the biggest reasons for the rally today is that there is a scramble in corporate boardrooms to get those buybacks in now before the tax goes up, he said.