Quarterly Market Commentary
Several policy-related risks loom in September and October that may lead to an increase in market volatility. The debt ceiling needs to be raised (likely by mid-October), the government needs to be funded to avoid a shutdown by the end of September, and the Democrats are trying to pass two major spending bills and will need to provide greater clarity on tax increases over the next several weeks. We believe the greatest risks come from the debt ceiling and taxes, but expect neither to have much near-term impact on the general trajectory of the bull market.
With deadlines forcing the action, what will market participants be watching? Primarily the debt ceiling and taxes. The two present contrasting risk profiles. Congress is extremely unlikely to let the U.S. default on its debt since it would likely have significant negative consequences for markets and the economy. On the other hand, Congress is very likely to raise taxes, driven by (slim) Democratic majorities in both chambers. But, based on history the immediate market impact is likely to be negligible, with the biggest risk around the hit to corporate earnings due to a higher corporate tax rate. On the other hand, taxes help contain deficits—it’s how you pay for what you spend, and for deficit hawks it’s preferable to borrowing. Best to spend wisely and tax lightly.
President Biden has proposed increasing the corporate tax rate from 21% to 28%, though we see the rate ending up closer to 25%. Individual taxes on upper-income individuals are also likely to go higher as the Democrats attempt to raise more than $1 trillion in tax revenue to fund a portion of their agenda. The Biden administration has proposed taking the top tax rate on ordinary income to 39.6% from 37%, and capital gains and taxes on those who earn more than $1 million to a maximum of 43.4% from the current 23.8%. While a capital gains tax increase on wealthy individuals is likely, we would expect an eventual compromise to land at a rate near 28%, which would put the total effective rate—including the 3.8% Affordable Care Act tax—at 31.8%
The Fed met this week to discuss its ongoing commitment to its asset purchase program. Since March 2020, the Fed has supported the economy and financial markets by purchasing $120 billion in Treasury and mortgage securities, and by keeping short-term interest rates near zero. As the economy continues to recover, however, the need for continued monetary support wanes. Coming into the year, we identified Fed policy as a key risk to higher yields. While we are in a similar situation today with the Fed likely to formally announce its intentions to taper its bond-buying programs soon, the markets have no reason to be surprised. The Fed has been communicating its intentions to eventually taper bond purchases for several months now. Markets should be well prepared at this point as the Fed learned its lesson from 2013 and has done a much better job communicating its intentions. As such, we do not envision another “taper tantrum” event that causes interest rates to spike higher.
We continue to be long term investors focusing on helping our clients live their best financial life.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through HighPoint Advisor Group, a Registered Investment Advisor. HighPoint Advisor Group and Kennedy Financial Group are separate entities from LPL Financial.
This presentation was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice speciﬁc to your needs, such advice services must be obtained on your own separate from this educational presentation.
The content in this material is for general information only and 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.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Any economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market.