Light Blue Wave Impact
The term “Light Blue Wave” has been quickly labeled by the Media. The Democrats hold a slim majority in both the House and Senate. Many are suggesting the slim majority will lead to some compromise on policy going forward. The most common belief is we will now receive more stimulus, perhaps another round of checks after the $600, in addition to funds for states and local governments, and more. Later in the year many are anticipating significant funds for infrastructure spending. No one can argue that money being poured into our economy will drive economic activity forward and faster.
President elect Biden plans to use deficit spending (as all Presidents do) along with tax increases to pay for the expenses. For this blog, the only concern is how will these plans will impact the markets/economy in the short and long run?
Increased volatility should be expected however its hard to see the economy, and then the markets, falling on its face for too long as these massive funds are deployed.
Bonds and Inflation
When the government spends more than it receives in taxes, debt is created in the form of US Government Treasury Securities. We the taxpayers, pay interest to the holders of the debt and will eventually have to pay the principal back. At this point with rates so darn low, the concern is that significant deficit spending going forward, along with the pent-up consumer spending demand, will drive interest rates higher on existing government bonds which leads to loss of principal value.
Last week, the 10 Year US Treasury finished the week with a yield of 1.11%, the first time over 1% since last March. This significant rise led the Barclay’s Aggregate Bond Index down (.94%) last week.
JP Morgan is suggesting the 10 Year may finish 2021 breaking 2%.
One of my concerns has been, and continues to be, will inflation rise faster than anticipated? I do not make any types of forecasts, however if we can truly move through the vaccination process expeditiously, people are going to be out and about spending, which should drive pricing of many commodities and products higher…. which of course, can lead to inflation.
What will happen? As always, time will tell.
Markets Race Higher
The first week of the year witnessed stock markets racing higher with the Dow up 1.66%, the S&P 500 1.88%, the Nasdaq 2.45% and the Small Cap Russell 2000 rising 5.93%. Over the pond, International stocks also participated, with developed stocks up 3.16% and Emerging Markets rising 4.79%.
So far this year, Value stocks are leading Growth stocks. It will be very interesting to see how this plays out through 2021.
I’m guessing taxes will pretty much stay as is for 2021 as we work our way back to a “normal” economy.
Click here to view & download our Key Financial Data for 2021, which includes a ton of great information. I also suggest you save this data and compare it to next year’s 2022 Key Data, as that is when I expect taxes to begin increasing. Several tax increases should be expected from income taxes, corporate taxes, payroll taxes, death taxes and limits on deductibility of IRA and 401k contributions.
2020 is a year that everyone should take a holistic look at their income and capital gains tax situation!
We will certainly be proactive with clients throughout the year based on the specifics of each situation. For those who are prospective clients who read our blog, please feel free to click here to schedule a complimentary consultation.