The New Economic Realities

In this audiocast, TC Wealth Partners CEO Bill Giffin interviews senior investment analyst Kevin Rice and Conway Investment Research co-founder Tom Margulis on the recent market volatility. Kevin Rice addresses the four key elements of the stimulus package while Tom Margulis gives his perspective on the implications for interest rates and inflation. Investors will learn about the Fed’s expectation for inflation and what economic indicators to watch as we enter Q2.

American Rescue Plan Act of 2021

Nearly a year after the first major stimulus package was passed, the American Rescue Plan Act of 2021 was officially signed into law by President Joe Biden on March 11. Biden’s signature comes just days before the enhanced federal unemployment benefits, established by previous stimulus packages, were set to expire. Here are the big-ticket items in the stimulus package and how they may impact you.

1. Stimulus Checks
   Individuals making under $75,000 and married couples making under $150,000 will receive direct payments of $1,400 per person. The bill also provides $1,400 per dependent.
2. Unemployment Benefits
   The bill extends unemployment programs through early September, including the $300-per-week federal supplement provided in the last stimulus plan passed in December.
3. Vaccine Distribution
   The bill will provide funding for vaccine distribution as well as coronavirus testing, contact tracing and genomic sequencing. It gives money to the Federal Emergency Management Agency as well.
4. State and Local Governments
   It provides $350 billion for states, local governments, territories, and tribal governments, and it contains about $130 billion for schools. It also includes funding for colleges and universities, transit agencies, housing aid, childcare providers, and food assistance.

• Our View:
• When the package was first announced in February, global markets were upbeat. But now, markets are realizing that a buoyant U.S. economy also means higher inflation. This has led to bouts of selloffs in the markets. We expect volatility to remain high as investors continue to gain a better understanding of the impact of the stimulus on the market and inflation. We believe that the additional spending could add 2% to U.S. GDP growth over the next two years. This spending is likely to reduce unemployment and push inflation towards the Fed’s 2% target. That is because people and firms receiving the aid will buy more goods and services. In turn, businesses will have to raise production and hire more workers. Increased production will boost GDP and push prices higher.

Biden Tax Proposal

Now that Congress has passed the next stimulus package the President is expected to shift his focus to an updated tax plan. We are still waiting to see specific new tax proposals from the Biden administration and a Congressional discussion and approval timeline. It might be the end of 2022 before tax reform makes it to the top of the legislative agenda. However, based on what we heard from President Biden during the campaign, we have compiled a few of the new proposals we expect to see with any coming tax reform.

1. Corporate Tax Increase
   President Biden has proposed raising the corporate tax rate to 28% from 21%. It is unlikely that Congress would raise the rate so dramatically. A more realistic outlook would put the corporate tax rate at or near 25%. The federal government’s primary interest will be striking a balance between raising revenue vs. driving potential businesses to offshore tax-havens.
2. Individual Tax Rate
   Biden’s campaign promised to increase the top individual tax rate from the current 37% to 39.6% for taxpayers earning more than $400,000. Without a full proposal detailing the exact implementation, many questions remain.
3. Higher Capital Gains Tax
   A higher capital gains tax rate for individuals earning at least $1 million annually was also proposed. This increase on long-term capital gain income would significantly affect business owners with plans to sell their companies. Those considering selling a business in the near term should consider this potential change in their ongoing planning.
4. Child Tax Credit
   Biden would like to see the child tax credit increase from $2,000 to $3,000 ($3,600 for children under age 6).
5. Estate Tax
   The current estate and gift tax exclusion is $11.7 million. Biden proposed reducing this to $3.5 million and increasing the top tax rate on estates to 45%. Because the estate and gift tax exemptions are currently linked, individuals may want to plan for gifts now.

• Our View:
• There is little historical data to suggest that the U.S. equity market has been primarily driven by changes in the tax code. The U.S. stock market has largely performed well even in the years in which taxes—be it personal, corporate, or capital gains—were increased. We believe that market performance is likely driven more by the state of the economic cycle rather than by changes in the tax code.

Federal Reserve

The Federal Reserve (Fed) kept rates anchored near zero and maintained the current pace of asset purchases, following the conclusion of this week’s Federal Open Market Committee meeting. The Fed expects that a bump in inflation this year will be short-lived and could increase to 2.4% before slowing to 2% next year. Fresh concerns that the Federal Reserve will let inflation accelerate sparked a selloff in most risk assets and caused yields on Treasuries to jump on March 18. The sell-off in Treasuries comes despite a dovish message from Fed Chair Jerome Powell, increasing expectations that the central bank will permit inflation to overshoot its 2% target as the economy recovers from the pandemic.

• Our View:
• Market experts all seem to be on the same page with the expectation for higher inflation in 2021 due to the huge amount of U.S. and global monetary and fiscal stimulus. CPI inflation in the U.S. is expected to top the Fed’s 2% target over the next few months, largely due to low year over year comparisons from the early days of the COVID pandemic. The 10- year Treasury yield started the year at 0.92% and has touched 1.7% over the past few days. It has moved higher for the right reasons and that is a positive sign for the economy. We believe inflation will remain contained in 2021 and bond yields will be rangebound. Experts have predicted higher inflation for 12 years – we will believe it when we see it.