There has been no year in my lifetime that has brought so much change as 2020. I surmise that this statement is likely true for virtually everyone reading this. The cataclysm of COVID-19 precipitated seminal change across the entire world resulting in many unexpected outcomes. The reverberations will be felt for decades as society continues to adapt to many new realities.
As 2021 dawns, the Democratic party has secured a tie in the US Senate, effectively creating a unified government for the next two years. Expectations are that the fiscal taps will open with additional COVID related financial “support” and possibly long delayed infrastructure spending. Concerns over long term debt will be the domain of conservative politicians and media but few others. Marginally higher tax rates loom for good earners and the prospect of a wealth tax could be on the table for the ultrarich. However, extreme tax reform is likely off the table given that there will not be much room to maneuver with the thinnest of thin majorities in both chambers. A return to an environment that resembles the rates before-2017 Tax Cuts and Jobs Act and policies with some additional adjustments to capital gains and/or dividends certainly seems possible.
Contrary to the environment for certain industries and elevated unemployment numbers overall, US stock markets smashed all-time records into the new year. Unbridled optimism about growth stocks and the technology sector reached internet bubble heights but has left old line ‘value’ stocks cheap according to many observers. Either way, it appears that the injection of money to the supply has given the market confidence that the Fed and the Democrats will stave off a long-term recession and maybe even create some growth in the future.
Bond markets are starting to view this possibility as a real one. All this coming stimulus should ignite, or at least normalize long stagnant inflation numbers. The treasury inflation protected securities (TIPS) market, which uses inflation as a source of return to the investor, has been pricing higher long-term assumptions lately, and the ten-year US treasury has breached one percent for the first time since the pandemic began. These are signs of normalizing in a still very abnormal economy.
Where does the above leave us, or you importantly? From a long-term investment and savings perspective, it somehow leaves you in roughly the same place you were in when the world turned upside down a mere nine months ago. A major theme of 2020 was the reaction of markets worldwide to a shock not seen in the modern era and how utterly unpredictable they were. The ‘good news’ is that with the arrival of vaccines for COVID-19, the end of the acute phase of the pandemic begins. With it brings a new US government and renewed optimism about economic growth, cleaner energy and potentially, a greater commitment towards equality. All these things are good for investors over the long run.
As always, please call us with any changes to your financial situation or any questions you have. We wish you good health, happiness, and prosperity in the new year.
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