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Markets embrace the optimism, and some early thoughts on tax changes

We don’t think you need to plan for changes to the tax code, yet

Our Top Market Takeaways for January  8, 2021.

Markets in a minute

Despite turmoil, markets are embracing the optimism

Yesterday, we provided an update to our outlook in light of the special Senate election results in Georgia. We concluded that while a slim (and delayed) blue wave in government is important for some parts of our view, it doesn’t change our overall outlook, or cause us to suggest material changes to portfolios.

But despite the chaotic political season, record COVID-19 deaths in the United States, and the shocking and violent events on January 6, financial markets are embracing optimism. 

Consider the challenges we’ve faced since the end of August:1

  • The S&P 500 suffered one 10% sell-off, then a separate 7.5% sell-off.
  • It took several days to tally all of the votes from the U.S. presidential elections.
  • The election results faced a slew of challenges, legal and otherwise.
  • The United States recorded 16 new records for daily new COVID-19 cases.
  • Much of Europe went into Lockdown 2.0, causing mobility to plunge.
  • A new, more contagious strain of the virus emerged.
  • And, to top it all off, a violent mob stormed the U.S. Capitol during the Congressional electoral certification process to confirm President-elect Joe Biden’s election victory. 

Yet, financial markets were not only resilient through this period, they thrived:

  • Global equities have made 20 new all-time highs.
  • U.S. small cap stocks have gained over 30%.
  • Emerging market equities are up over 18%.
  • Developed market stocks outside the United States are up ~15%.
  • Within the S&P 500, financials (+23.5%), materials (+19%), energy (+18.5%) and industrials (+14.6%)—classic cyclical sectors—are the top performers.
  • Semiconductors (one of our favorite segments) are up 28%, an outstanding return that pales in comparison to clean energy (another favorite), which is up almost 90%.
  • Commodities linked to economic growth are rallying. Crude oil is up 19%, and copper is up 23%.     
  • U.S. 10-year Treasury yields are up to 1.07% (close to a 40 basis point move), and the highest since March.
  • 10-year average inflation expectations are over 2%, and the highest since 2018.
  • The market still isn’t expecting the Federal Reserve to start raising interest rates until the end of 2023 at the earliest.

Optimism is winning out over the risks. Of course, Pfizer, Moderna and AstraZeneca/Oxford’s vaccine announcements allow investors to start imagining a post-COVID world. And although the political season was chaotic, it is now (almost) over.

The global healing process is still underway. More fiscal stimulus is now likely in the United States, and earnings are still recovering. There will be new challenges that the global economy and markets may have to face, but we expect that the positive momentum will continue. The biggest risk is probably a surprise spike in rates, though we don’t see that as likely.

Importantly, in considering the path ahead, we encourage all investors to develop a solid plan that aligns with their goals. There will be many more opportunities, and challenges, in 2021. A holistic plan can help ensure that investors have confidence that their investment portfolios are well suited for what they hope to achieve. 


Why we don’t think you need to plan for changes to the tax code, yet.

While markets seem comfortable with the slim blue wave outcome, one of the biggest questions remains if, and when, there will be sweeping changes to the tax code. While we think there is likely to be some tax legislation proposed later this year, we don’t think there’s a reason to change your plan (at least not yet). There are four key reasons why:

  1. Tax legislation is not considered an immediate priority for either the incoming administration or either legislative body. In other words, any changes are still quite a ways off. 
  2. Any sweeping tax policy changes would likely require either: (a) 60 votes in the Senate, to avoid a filibuster; or (b) use of the reconciliation process, which would require only a simple majority of 51 votes (or 50 with the tiebreaker of the Vice President). We don’t think the filibuster is going away, nor do we think Republicans are likely to sign on to any significant Democratic tax proposals. This would mean that in order for any tax bill to pass through reconciliation, every single Democrat would need to be onboard, including some moderate Senate Democrats who are closer ideologically to moderate Republicans than to the left-leaning members of their own party. For this reason, it seems likely that any proposed tax legislation will look more moderate than the policy that President-elect Biden campaigned on. For example, the corporate income tax rate might move up to 25% instead of the proposed 28%, and any increases in individual and payroll tax rates might be similarly more modest.
  3. While do expect to see infrastructure bills introduced, there may be little appetite to fund them through additional tax increases. Instead, with interest rates at very low levels, finding such projects by borrowing may be the path of least resistance.
  4. We don’t expect any eventual tax bill to be passed retroactively. This would provide more time to thoughtfully implement any recommendations that would be appropriate once the final bill is passed and before it becomes effective. While there is always a chance it could be retroactively applied, we think this is a slim possibility. 

Ultimately, tax changes may be coming, and perhaps even as soon as the end of this year. However, we encourage investors to take a measured approach here. Any tax changes are likely to be more moderate than what we saw proposed during the campaign, and as proposals are rolled out, we’ll have plenty of time to work together to prepare. 


1.Events and returns are since September 1, 2020.





All market and economic data as of January 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

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