Here’s what we expect for your taxes and investments
Elyse Ausenbaugh, Global Market Strategist
Jordan Sprechman, Managing Director
Election uncertainty is gone. President Joseph R. Biden is in the White House and his party has a majority in Congress.
Democratic control has led many to ask: What will this mean for my taxes? Our answer: Rate increases are on the table, but we don’t foresee dramatic hikes. The Democratic majority in Congress is one of the smallest held by a party since 1901, and Congress is unlikely to abandon the filibuster.1 Therefore, much of the legislation proposed by Biden on the campaign trail will likely have to be watered down to have a chance of passing.
Moreover, don’t expect any tax legislation to be considered until later this year, at the earliest. There likely won’t be changes to your tax bill until at least 2022.
First, President Biden wants to focus on what he says is the “urgent business of the nation”: beating the COVID-19 pandemic and revitalizing the economy. Both these efforts have important and immediate implications for investments.2
So here is what we expect around each of Washington’s key domestic policies —virus containment, economic stimulus and tax reform—and what they might mean for your finances.
Controlling the pandemic
With the pandemic’s daily U.S. death toll near 4,000 from COVID-19, vaccines offer hope we’ll make significant progress toward eradicating the virus in the coming year. So far, though, distribution has been slower than expected. As of January 15, only 42% of doses distributed in the United States have actually been given to people—in large part due to the strategy of holding enough stock for second doses.3
Biden has announced an ambitious plan to expand access to vaccines by providing them at more sites (e.g., pharmacies and mobile clinics), and to more groups (e.g., lowering the eligible age from 75 to 65). The challenge is supply, which the Biden team says it will address by employing the Defense Production Act. But it will take time to produce enough even for the eligible groups.
Biden’s team also says it wants to expand testing, replenish personal protective equipment inventories and provide detailed guidance on containment measures.
Clearly, the virus’s spread will shape the U.S. economy and markets in 2021. For a detailed analysis, see our 2021 Outlook. But generally speaking, it is apparent that, even without an effective vaccine, certain pockets of the economy and investment landscape can continue to thrive (e.g., e-commerce and housing). However, getting COVID-19 under control is key for the recovery of such high-contact sectors as entertainment, hospitality and dining, which are contributing most to the current weakness in the economy and labor markets.
Even if the vaccine rollout happens more gradually than originally expected, we still think the time to position investment portfolios to benefit from it is now. Two examples:
- Add to investments in cyclical areas of the market. In the portfolios we manage, we’ve increased exposure to the broad S&P 500, and also to specific areas such as industrials and financials. Those sectors underperformed higher-growth and more defensive parts of the stock market last year; we think they could lead the market in 2021 as global economic healing continues.
- Invest in real estate. We believe the real estate portfolio managers with whom we work are positioned to take advantage of an improving outlook for offices, resilience and strong demand for industrial assets, and compelling demographic drivers in the housing space. In addition to exposure to current recovery dynamics, real estate investments may offer a good source of portfolio diversification and income generation, both of which are desirable in this ultra-low interest rate environment.
Revitalizing the economy
Virus containment measures have contributed to meaningful stress in the jobs market. More than 10 million Americans seeking work are unemployed. Millions more have been pushed out of the labor market entirely. Both the Biden administration and Congress have expressed a desire to bridge the income gap for the unemployed and to keep businesses afloat—until a normalization in activity can make the recovery more self-sustaining.
The $900 billion fiscal relief bill passed before the new year contained provisions aimed at providing that support. Biden said that $900 billion was a “down payment,” and, a week before taking office, proposed what he’s calling the “American Rescue Plan”: a $1.9 trillion package aimed at the twin crises of the pandemic and its economic fallout. About $1 trillion of the proposed spending would go toward direct aid to families (including additional $1,400 stimulus checks to individuals, extended unemployment insurance, rental protections and nutrition assistance). In addition, more than $400 billion is proposed as relief for small businesses and local governments. Much of the balance would go to beefing up the response to the pandemic.
Biden also made it clear this proposal was merely emergency spending aimed at addressing the most immediate healthcare and economic needs; his plan for a broader recovery would follow.
Yet to be seen is how much of part one of the American Rescue Plan Congress will approve, particularly if Biden seeks bipartisan support for the proposal. The price tag is higher than Republicans have so far been willing to spend, and it includes measures they oppose, such as raising the minimum wage to $15 an hour.
Regardless, we expect some form of the package will be negotiated and adopted—giving a boost to economic growth and keeping us in a period of “reflation” (i.e., a healthy rise in expected and realized inflation that benefits equities, real estate and other assets).
Beyond the relief measures, we see the possibility for federal investment in infrastructure sometime this year. There’s general bipartisan support for infrastructure spending, and such an investment could advance a number of the Biden administration’s goals: Building new transit, energy and data infrastructure might modernize the U.S. economy and create jobs. It also could help the United States move toward the administration’s expressed goals of de-carbonization and sustainability.
From an investments standpoint, we think it’s time to:
- Lean into beneficiaries of potential infrastructure investment. Companies related to clean technology, transport, machinery and materials segments could experience tailwinds. (We’re keen on balancing those exposures with long-term, secular growth winners, such as technology and healthcare.)
- Set aside fears of fiscal austerity. The federal government seems likely to continue to support the economy to a significant degree. That increases our comfort in adding risk to portfolios in general, whether via additional equity exposure or by investing in high yield fixed income and hybrid securities (e.g., preferreds) to find yield.
Raising taxes?
Given the extremely slim majority the Democrats hold in the Senate, tax legislation is expected to be more incremental than what the Biden campaign proposed before the election. Democrats might pursue tax changes via the budget reconciliation process, which is a way to work around the filibuster.4 But they hold only 50 seats in the Senate, with Vice President Harris as the tiebreaking vote. That means every Democrat (and independents who caucus with the Democrats) would need to support a bill for it to pass. Such unity likely will be won only with moderation.
How much more moderate might tax increases be as a result? One example: The corporate income tax rate may increase four percentage points rather than the Biden campaign’s proposed seven percentage points, and a proposed increase in the top income tax rate from 37% to 39.6% might be phased in over a number of years. Incoming administration officials have indicated they would weigh the deleterious impact of any potential tax rate increases on a perhaps still fragile economy.
As for when: We don’t expect Congress to look at taxes seriously until the second half of this year, or possibly not until 2022. Moreover, even if a new tax law is adopted in 2021, it’s highly unlikely to be retroactive (tax law changes rarely are).
That means it’s probably too early for you to consider changing your wealth plans in anticipation of higher tax rates.
Embracing optimism
While change may be coming, it’s likely to be more evolutionary than revolutionary. Investors can take heart in a legislative agenda that supports economic recovery and growth. For taxpayers, we suggest focusing on actions that might be taken right now that will help you make your 2021 a financial success. And, as always, we encourage you to reach out to discuss these and other financial matters with your J.P. Morgan team.
1 In the U.S. Senate, the filibuster is a tactic used to prevent a vote on a measure. Under Senate rules, just one senator or a series of senators can effectively prevent a bill from being voted on—unless three-fifths of the senators (60) vote to bring the debate to a close and allow the vote. In effect, therefore, unless one party controls 60 votes in the Senate, it cannot expect to pass legislation over the objections of opponents willing to filibuster. There is one exception to this rule: Senators cannot use the filibuster to prevent consideration of a “reconciliation” bill, a device Senate rules limit the use of.
2 January 13, 2021, www.cnn.com/2021/01/13/politics/biden-senate-impeachment/index.html.
3 www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/.
4 See footnote 1.
