We enter the final month of 2021 with the expectation that Washington will finally provide answers regarding new taxes and social spending before the New Year. The Biden Administration’s “Build Back Better Bill” will either provide those answers or die on the Senate floor this month. We know the bill will include tax hikes, it will not be cheap and certainly not pay for itself. Most importantly, though, we need to determine how new tax rules will impact individual investors and corporate profits.
Our economy has recovered mightily since the dark days and deep bottom of 2020. In the U.S. we are fortunate in many ways, but we may be pressing our luck.
Fed Chairman Jerome Powell now concedes inflation running at 6.2% is a problem. Transitory talk is passé. Action, aka higher rates, may arrive sooner than many expected.
On the last day of November, he suggested the Fed would likely speed up the tapering of bond purchases. That is Fed-Speak for ending the stimulus program that was first enacted during the beginning weeks of the pandemic. As a result, this paves the way for raising interest rates.
While this small step in the direction of monetary sanity is welcomed, it scares investors who have long drunk the Kool-Aid of low rates forever. Low rates give us higher stock prices because there is little competition from bonds, which are the main alternative.
Cash becomes worth less daily with inflation acting as the silent tax on savings. Interest rates remain extremely low throughout the globe, even negative in major Eurozone countries like Germany. Where else can one go for adequate returns on their money other than stocks, commodities, and real estate?
Covid has not gone away; bottlenecks in supply chains remain, but consumer spending and government largesse have continued unabated. Large corporations in this country and abroad have coped very well under the Covid cloud.
Frankly, it has been amazing what they have done and how well the top company shares have performed this year. The big winners continue to grow earnings at a rapid pace. Earnings are currently at record levels, and more gains are anticipated in 2022.
Investors are seemingly hesitant about future gains. John Maynard Keynes once reportedly said, “Stock prices can remain irrational longer than I can remain solvent betting against them.”
Some important actors are heading for the exits, like the CEO of Microsoft who recently sold 50% of his personal MSFT holdings. Elon Musk, the richest entrepreneur on the planet, began selling up to 10% of Tesla last month. These actions are likely tax driven events, as the ultra-wealthy prepare for higher tax rates in 2022.
So, we watch the impact of the Omicron variant and wait to see if the rules of the road will change on tax policies and/or government intervention. Regardless, innovation continues to live and thrive in America.
We wish you all a very happy holiday season.
Doug Coppola - Investment Committee Chairman
Steve Lindgren - Chief Investment Officer