January 11, 2021Michael Novak

So what do we do now?

“A Republic, If You Can Keep It”
Quote attributed to Ben Franklin the day after the delegates to the federal convention (that became known as the Constitutional Convention) signed the Constitution and officially adjourned.

Unprecedented. I thought we would stop using that word when 2020 came to an end. However, after what we all witnessed on Wednesday at our Capitol, it is a word that still makes its way to our lips. Change needs to happen – for us as Americans and our Republic.

Earlier this week we participated in a 2021 Outlook call hosted by JP Morgan (which followed the Senate runoff election in Georgia). While the “blue wave” did not fully materialize, concerns are still top-of-mind for some regarding future policy, significant changes to both income and estate taxes under the new administration, and the impact on the economy and stock market. We hope to calm some of those concerns.

Policy changes will be muted
While Biden ran on a significant tax increase (see Exhibit 1 below), we don’t believe they will be fully enacted into law. As we have seen from many new Administrations, once they are in office, actual policy changes are more muted. Under a Biden/Democrat-controlled House and Senate (Exhibit 2), there still will be changes, but not as significant as the original agenda.

Exhibit 1

Exhibit 2

Biden’s agenda was obviously dependent upon the outcome of Georgia Senate runoff elections. Since the Democrats won both seats, they could enact tax/spending changes with a 51-50 Senate majority using budget reconciliation rules, and enact other major policy changes by jettisoning the Senate filibuster (which if retained, requires 60 votes in the Senate to pass most legislation). However, even though the Democrats attained 50 seats in the Senate, they may find it difficult to (a) use budget reconciliation to pass Biden’s tax and spending proposals with very narrow Senate and House majorities, and to (b) jettison the Senate filibuster which has been used frequently in recent years by both parties to block legislation. Filibuster supporters reportedly include Joe Manchin (D-WV), who is ideologically closer to moderate Republicans than he is to progressive Democrats.

While we expect there will be several policy changes this year, we do not expect some of the more major changes to materialize (New Green Deal, progressive agenda items and court packing). While candidate Biden campaigned on raising $4 trillion in new taxes to offset increased spending, attempting to raise taxes in an economy that is still recovering may prove difficult, suggesting any tax increases are likely to be far more gradual. Raising the corporate income tax rate to 28%, as some Democrats had proposed, will also be difficult given a closely divided Congress. Rather, we believe a corporate tax rate of 24%-25% appears more likely. Time will tell.

If there is so much uncertainty (i.e anxiety), then why is the stock market doing so well?

Yesterday all of the major US stock indices (Dow Jones, S&P 500 and Nasdaq) closed at record highs. At the same time, the economy is still suffering and this week’s jobs reports was not positive. As you know from our year-end planning meeting, we expect the economy to do well this year, driven by several factors including:

Vaccinations are here and more to come (slow start, but Biden has an aggressive plan in the first 100 days)
Additional fiscal spending/support (more stimulus package as well as a $1-2T infrastructure bill)
Accommodative Fed (0% rates for at least the next 2-3 years)
Pent-up demand/spending from the consumer (who represents 2/3 of the economy)
Over $4T of investor cash sitting on the sidelines

We spent a lot of time last year on asset allocation – making significant tactical changes and additions to ensure portfolios were properly positioned for the future. The capital markets are forward looking, and so is your portfolio. While there are ongoing headwinds, there are more positives than negatives.