Observations and Expectations for Investors In 2021
Adams Brown Wealth Consultants Presents Post-Election Webinar
The 2020 presidential election is in the bag and a new administration is preparing to take over in January. This election year has been anything but normal and going into 2021 there is significant uncertainty in certain sectors of the economy. Nevertheless, upon news of ongoing cabinet appointments, Wall Street is yet again trading high. What can investors expect as the year winds down and a new presidential administration takes shape?
Just over two weeks after Election Day, Adams Brown Wealth Consultants, hosted a webinar to present expectations on market performance in 2021. The immediate response was not to expect drastic, sweeping changes anytime soon. Neither political party completely controls the White House and all of Congress so there will need to be some level of bipartisan support for any measures passed after January 20, 2021. However, that could change depending on the outcome of Georgia’s two run-off Senate elections in January.
The Impact of COVID-19
Nothing dominated public health, the news, and financial markets quite like COVID-19 this year. Record-setting relief packages passed in March helped thousands of businesses and millions of individuals with much-needed support; but with Congress in deadlock for weeks ahead of the election, hopes for another round of relief before year-end faded.
We can expect more COVID-19 relief early in 2021, though scaled back from a version like the CARES Act. Looming questions are whether a new $1 trillion package will be enough to last and if a reliable vaccine can be implemented fast enough. When a vaccination does become widely available, if up to half the U.S. population would not even take it, the financial markets could take even longer to recover.
When the CARES Act was passed in March 2020, it allocated $300 billion to economic impact payments, or individual stimulus checks. About 35 percent of Americans saved that money, another 35 percent used it to pay down debt and just 18 percent of taxpayers used the stimulus to purchase essential goods.
The same trend became evident with the expanded unemployment benefits. 22 percent of recipients used that infusion of weekly cash to save, and 23 percent used it for essential spending. Household income actually went up during COVID-19 from $19 trillion to $21 trillion, surprisingly; but it increased because of COVID-19 stimulus payments. The data is concerning because while saving and paying down debt are smart strategies, the data indicates that money wasn’t flowing back into the economy. Specific industries may not have gotten the money they needed.
At the time of the webinar, jobless claims went up for the first time in five weeks, which is the beginning of another contraction in corporate profits and taxpayers’ ability to work. That’s why the next round of stimulus needs to be very targeted to achieve true economic growth.
2021 Likely Developments
Next year, a $1 trillion COVID-relief stimulus bill, climate change initiatives (though not as expensive as what’s been proposed), a modest infrastructure spending bill, drug pricing reforms (like low-cost medical care solutions) and tougher antitrust enforcement are anticipated. Infrastructure spending is one of the areas that both parties tend to agree on, though the dollar amount of spending is another story.
If the Republicans maintain Senate control, areas that are less likely to happen in 2021 include significant corporate and individual tax increases, huge capital gains tax increases, the financial transactions tax, eliminating the Senate filibuster, or Supreme Court expansion. This doesn’t mean there won’t be any tax increases in 2021, but at this point it’s difficult to imagine a likely scenario where substantial tax increases across the board are realistic for the short-term future.
Speaking of tax rates, historical rates back in 2000, which were very high, were reviewed. Since then, U.S. and global tax rates steadily decreased until the Tax Cuts and Jobs Act of 2017. Since the beginning of 2018, U.S. tax rates have been significantly below global median effective tax rates. Abnormally low tax rates have been a major contributing factor to economic stimulation, corporate profits, and a robust financial market.
If Georgia’s run-off elections in January result in a Democratic-held Senate, then it becomes much more likely that some aggressive tax changes would go into effect. A comparison of current tax rates and who they affect versus proposed tax increases was highlighted during the webinar.
Next, questions regarding Chinese investments were discussed. It is expected that pressures put on the Chinese government by way of tariffs will continue in the President-Elect Biden’s administration as well. This means it is likely that Chinese imports will continue to decline and become closer in line with American exports to China. Because of this continued pressure and political tension, some are under-weighting allocation of investments to foreign stocks, specifically China.
Planning for the Future
The real question is how to take the information from the recent presidential election and make investment decisions.
Two macroeconomic factors influencing investment strategies over the near-term include the amount of national debt and the interest rate environment. The U.S.’s federal interest rate is at its lowest in years, and substantially higher rates in the next two to three years aren’t expected, either. Interest rates on CDs are expected to remain low for at least five years, if not ten.
This is because low interest rates allow consumers to borrow cheaper and it drives growth in the economy. Since COVID-19 has done so much economic damage, it’s unlikely the Fed would increase rates anytime soon. Another speculation for low interest rates is that the national debt, even before COVID-19, was at an all-time high. In this year alone, $2.5 trillion was added to it. If interest rates go up, then the U.S.’s interest on national debt also goes up.
Given these factors, fixed income portfolios should consider focusing on shortened durations of loans and increasing credit quality for consumers who are worried about corporate or governmental bankruptcy. Instead, loan money to those with the highest credit quality, not companies that are barely hanging on. Focus on corporate-grade investments of AAA quality, not BB and C-rated investments. Some portfolios will bring those in because they pay high interest rates, but the risk of default is too high in this environment.
Preferred stocks to portfolio are also being added for some. Preferred equities trade like fixed income but pay a nice dividend. Preferred equities add a dividend yield, not grow in value like a normal stock would.
For equity portfolios, limiting exposure to China given the increased pressure with tariffs discussed earlier may also be recommended. His other point is to slightly overweight equity portfolios to infrastructure, healthcare, and technology. He cautioned to avoid an all-in or all-out approach and that broad diversification is the goal. However, specific tilts one way or the other as the market evolves are normal and expected.
Seven Predictions for the Next Year
- Modest changes in the tax code
- Rise in preferred stocks and alternative investments like annuities
- Continued China regulation
- Infrastructure spending
- Tighter regulations on financial institutions
- Expansion of low-cost medical care provisions
- Restrictions in oil and gas drilling will continue substantial volatility in oil and gas markets
Although each situation is unique, one place to start is to convert retirement dollars to Roth IRAs. Doing so would allow high-income investors to lock in the current low tax rate before it goes up. He also recommends adding preferred stocks and annuities to fixed income portfolios and move away from bonds, as well as investments in financial institutions as he expects tighter regulations in this sector in the coming year.
The key is to be proactive. Going forward, stay invested and avoid going cash or gold more than five percent of a portfolio. Maintain diversification and make changes for over- and under-weighting according to the market. Remember that the goal hasn’t changed, whether that’s to reach retirement, leave money to the kids, or other long-term investment goals.
While these are observations and expectations of a market in flux, this article should not be construed as official financial or wealth management advice. For a free review of your individual situation, reach out to Adams Brown Wealth Consultants anytime.