In the January issue of our monthly flagship publication, we feature:
- On the Record by Chief Investment Officer Tony Roth, where he details the path forward amid the arrival of effective vaccines and a new administration with a unified government under Democrat control. He provides an overview of three key investment domains and details the importance of having a proper investment plan to help investors emerge unscathed on the other side.
- In Focus explores the trends that are unfolding at an accelerated pace as noted in our 2021 Capital Markets Forecast. How will they affect the way we live, work, and invest? How much do you know about what we believe you can expect? Take our fun quiz to learn your 2021 Capital Markets Forecast IQ.
- Investment positioning and domestic equities asset class overview.
It was with a distinctive mix of relief and hope that we turned the page on the calendar year, leaving behind a convulsion of health, political, economic, and market disorder that had rocked the world. Barely a week in and the new year hardly seems to have shepherded an abatement to the past year’s chaos and uncertainty.
Nonetheless, as we look past the continuing tragedy of COVID-19, the recent violence in our nation’s capital, and an unprecedented second presidential impeachment, an undoubtedly brighter path forward emerges. The arrival of effective vaccines along with a new administration likely to increase fiscal support for a badly battered economy underwrites our confidence that the second half of 2021 will feel a world apart from the past year. It is with this conviction that we positioned portfolios late in 2020 to overweight risk assets (where the return is uncertain), anticipating the healing before it arrives. Risks remain, as they always do. But now is the time to press any economic and market advantages as the nation and the world accelerates its convalescence.
Specifically, we start the year with an overweight to equities, focusing on U.S. small cap and emerging markets, and underweights to investment-grade fixed income and real assets. We have also recently eliminated gold from our portfolios and returned commodities to a neutral weight.
Politics and policy
With the inauguration, a protracted, historic, and emotional political season will finally draw to a close. Democrats in Georgia have delivered an upset victory to tie the Senate, in turn, delivering to Vice President-elect Kamala Harris the tie-breaking vote, and to Democrats one of the narrowest congressional majorities in history. Back in November, the stock market cheered the prospects of a divided government. Now that the government is not divided but is in fact unified under Democratic control, the market is, well, still cheering. In our view, the continued market momentum owes to two realities. First is the basic fact that the Democratic Senate majority is indeed razor thin and not likely to result in the type of progressive tax policy that would harm an economic recovery before it even gets going. Second, as noted earlier, we expect the new Washington power lineup to result in a material increase in fiscal support. Whether it be infrastructure spending, $2,000 checks, or state and local aid, more government dollars is good for the economy and thus good for markets.
Here is an overview of how we see events possibly shaping up around the three key investment domains of federal spending, taxes, and regulation in light of the slim Democratic Senate majority:
- Spending—Additional near-term fiscal stimulus beyond the $900 billion passed in December to address the pandemic would require the support of 10 Republican senators or some way of paying for it via the budget reconciliation process.
- Taxes—Corporate or personal tax increases can be accomplished through the budget reconciliation process and a simple majority in the Senate; the Republicans handed the Democrats that playbook back in 2017. With the economy so weak and midterm elections in 2022, we would expect this to be a late 2021 or early 2022 priority. Additionally, we anticipate increases in the marginal tax rate for top earners and the corporate tax rate to at least 25%.
- Regulation—Likely to escalate, this would be to the detriment of core economic sectors, including energy, health care, financials, and technology. Most of these changes will transpire within the framework of the executive branch and will not require legislative action. Standards around bank capital reserve (liquidity) buffers and consumer protections could be raised within the first year of the new administration. Tech regulation is also likely to increase given that a broad consensus now exists among Democrats and Republicans relative to both reversing monopoly powers and enhancing consumer protections, particularly in the privacy area. It is a certainty that the new administration will take a much tougher approach to energy regulation from an environmental perspective. Last, the Biden administration is likely to continue the work of the Obama era toward greater equality within the health care arena.
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