January 28th, 2021
What a year it’s been! While many of us are all too ready to close the door on 2020 and start with a clean slate in 2021, I thought it would be useful to provide a little clarity as to where we are in this ever-changing economy. With that in mind, I want to give some brief commentary on a few major topics that are frequently showing up in conversations right now. Here are the top 3 questions we have been asked in recent weeks:
1. With the new Biden administration in place, how much will my taxes go up?
There will likely be some amount of tax reform on the agenda for the new administration, but it will not impact everyone equally. Many people believe that their personal income tax rate will increase, but that’s unlikely to be the case because the majority of Americans don’t fall into the highest income tax brackets where change will be most immediate. It seems likely that the top income tax bracket will increase back to the previous level before the 2017 tax reform happened – to 39.6% [i] – but that’s for the highest earners only. Most Americans fall under the $400,000 income threshold, and those taxpayers are the ones that the Biden administration vows not to push increases upon. So, that concern should be reduced by knowing that the majority of the income tax increases will be aimed at the very top earners. These policies may, in fact, be a step towards addressing the goal of decreasing wealth inequality in our country.
Additionally, there will also be debate in Congress about potentially increasing the tax rate on capital gains in investment accounts, but it’s far too early to know how that will play out. The more important potential tax change would be the raising of the corporate tax rate from its current low rate of 20% to a proposed rate of 28%. [ii]This is important because a higher corporate tax rate would mean that businesses would keep a smaller percentage of their income as profits – and corporate profits are one of the main drivers of stock market performance over time. Even at 28%, the corporate tax rate would be lower than it’s been in previous decades, so this is not a game changer for the markets. Plus, these changes are not likely to be effective for 2021, leaving plenty of time to plan for anyone that is affected negatively by the changes.
2. I thought if Biden won the election the markets would drop, so why have they gone up instead?
Many voters thought that the Biden administration would be anti-business or not very market friendly, and we won’t know whether that’s true or not for a while. What we do know is that no two presidents are the same, and Biden will have a different focus while in office than previous administrations. The markets rose once we got the election results because that brought more clarity on additional stimulus for our reeling economy – both quicker delivery and a larger stimulus package. That goes hand-in-hand with the positive perception that Biden will do a far superior job of dealing with the COVID-19 pandemic than his predecessor. The markets cheered the possibility of a quicker path to mass vaccinations and therefore a quicker and safer reopening of the economy (again, company profits = rising financial markets).
Aside from addressing the immediate global health crisis, Biden has included in some early proposals a much-needed infrastructure plan that our country has been waiting on for a few years now. Yes, the price tag for these agenda items is large, but markets like good plans that will strengthen our nation. It seems that infrastructure under the Biden administration will include some areas that investors and markets agree with, including clean/green energy and support for the 5G wireless buildout. There are plenty of other areas that are causing optimism in the markets, and we’re happy to talk more about this in your review meetings.
3. What’s this ESG investing concept I keep hearing about, and how does it affect my investments?
There is a growing trend towards socially responsible investing that is now referred to by the acronym ESG. This is a methodology of sustainable investment management that focuses on (E)nvironmental issues, (S)ocial issues, and corporate (G)overnance in the creation and management of portfolios. Not only have these issues become front and center in society today, but investors have been voting with their dollars. New money flows into ESG investments have been nothing short of remarkable in the recent past, and that pace looks to continue. The Biden administration will likely support this trend[iii]. It appears that one of the first actions of the new administration will be to have the U.S. rejoin the Paris Climate Accord, which will then be followed by a number of important new regulations. Proposals include stricter limits on emissions from the oil & gas industry, stricter energy efficiency requirements for buildings and appliances, and the requirement for public companies to disclose climate risks in their operations and supply chains. While that is just a small sample for this letter, know that other big-ticket issues being addressed also include gender pay inequality, diversity on corporate Boards of Directors, as well as a range of privacy and data issues.
Gone are the days where investors felt that they had to give up investment returns in exchange for having some “do-goodery” in their portfolio. ESG investing is starting to become the norm when professional managers explain how they manage portfolios, and this is no fad.
We at HighPoint Advisors, LLC are optimistic about this year in the markets. We feel that we will have the information and clarity that we need to effectively manage your portfolios as our country works through the last phase of the COVID-19 pandemic and the first phase of the new president’s term.
We’ll be in touch as we always are, but please reach out to us if you have any questions or concerns.
Thank you all for your trust and confidence in our team!
Adam (AJ) Loedel, CFP®, ChFC, RICP, LUTCF
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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