January 25, 2021 Letter to Clients

Hindsight is 20/20

The events of the last year need little explanation. We have turned the page on a year of unparalleled uncertainty with a pandemic, economic disruption, social and political unrest to a year begun hopeful with vaccine rollouts and likely additional stimulus spending.

As I write this letter, we are just over two weeks into the year and the country is grappling with a more infectious virus strain, renewed political turmoil with rioters having recently stormed the U.S. Capitol and the second impeachment of Former-President Trump. As many of us watched in shock at the heartbreaking events unfolding at the Capitol on January 6^th, the financial markets were largely indifferent. While divisions across the country run deep, I continue to hold out hope they can be bridged through more productive means. Addressing the economic fallout from the pandemic through stimulus measures and increasing the pace of vaccinations will be key in the government’s efforts to heal the country and restore a shared national purpose in moving the country forward.

What can we anticipate in President Biden’s first 100 days?

The first 100 days of a presidential term has taken on symbolic significance since the term was first coined by Franklin D. Roosevelt in 1933 and is often seen as a benchmark to measure the early success of a president. Although 100 days does not seem long enough for a new president to implement policy priorities, as it represents a mere 7 percent of a president’s term, President Biden’s to-do list this Spring will set the tone for his entire term.

Biden has stated his first priorities will be providing much-needed relief to American households through the recently unveiled stimulus package, the American Rescue Plan, and attempt to stall the spread of the virus through ramped up vaccination efforts with a goal to vaccinate 100 million Americans in 100 days.

Long-term, the Biden-Harris administration has also proposed robust infrastructure spending and job creation, reforming Obamacare, and tax increases for high earners and corporations. However, the Senate’s procedural hurdles in allocating time to address both Former-President Trump’s second impeachment trial and confirming Biden’s Cabinet as well as passing Biden’s legislative proposals may derail the President’s agenda.

What is President Biden proposing to address the economic fallout from COVID-19?

With first time jobless claims having increased in the first weeks of the year and over 10 million Americans still unemployed, the need for another stimulus package could not be clearer. On January 14^th, the President unveiled his robust stimulus proposal titled the American Rescue Plan and announced that a second spending proposal would follow next month to spark economic activity. Here’s what the President is proposing:

American Rescue Plan (current proposal as of January 14, 2021) - $1.9 trillion proposal to include:

Direct payments of $1,400, bringing total relief to $2,000 including December’s $600 payments
Increased weekly unemployment benefit to $400, extending it through the end of September
Increasing the federal minimum wage to $15 per hour
Extending the eviction and foreclosure suspension through the end of September
$350 billion in state and local government aid
$170 billion for K-12 schools and higher education
$50 billion for coronavirus testing
$20 billion towards vaccination programs, partnering with states, localities and tribes
Increasing the Child Tax Credit to $3,000 per child ($3,600 for a child under age 6) and making the credit fully refundable for the year

Infrastructure: A second proposal expected to be announced in February, under the label “The Biden Plan to Invest in Middle Class Competitiveness,” is focused on infrastructure investment. While many hear the term infrastructure and think it only refers to roads and bridges, it encompasses much more than that. Infrastructure is vital to a country’s economic development and prosperity and includes everything from improvements for transportation systems and communication networks to upgrades for sewage and water, and electric systems.

Under the expected proposal, the Biden-Harris administration plans to infuse billions into school renovations, removal of lead pipes and access to broadband internet in rural, underserved areas of the country, as well as improvements to airports and inland waterways. There are also plans under the proposal to evaluate the resiliency and long-term sustainability of what is built in tandem with a push to focus on clean energy projects. This incredibly ambitious plan would be transformational for the country, creating potentially millions of jobs for decades to come in terms of construction, skilled trades, engineering and more.

Tax Increases: One of the big proposals that many Americans are focused on is Biden’s proposal to raise taxes. This is often a focal point for many presidents no matter the side of the aisle on which they sit. After all, this country was founded on Americans’ rejection of the King’s taxes. A few hundred years later and the debate over taxes is still going strong.

Under the current tax reform framework, the Biden-Harris administration is aiming to:

Not raise taxes on Americans earning less than $400,000 per year
Raise the marginal income tax rate from 37% to 39.6% for those making more than $400,000
Additional 12.4% Social Security payroll tax for those making over $400,000 per year, split evenly between employers and employees
Flat refundable tax credit for 401(k) plans giving low-income earners a bigger tax break upfront and high-income earners a smaller tax break
Raise corporate taxes from 21% to 28%
Tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million
Eliminate the step-up in cost basis for heirs receiving inherited investment assets
Lower the estate tax limit to $3.5 million per individual in bequeaths and $1 million in gifts

Even with a razor-thin Democrat majority in the Senate following the Georgia run-off elections, the likelihood of passing a comprehensive tax overhaul as it stands under the current framework is slim. If tax reform were to pass under the current administration, I expect it will be a watered-down version of the current proposal.

What can we expect the markets and the economy to look like this year?

If 2020 will be associated with the great toilet paper shortage and the word “unprecedented” being used…well an unprecedented number of times, the next stretch in our return to “normal” is poised for a tidal wave of consumption once constraints are lifted. The words “pent-up demand” will be the new hashtag for business executives and economists as people ravenously consume what was previously out of reach such as hotel rooms and airline seats.

Americans, in general, are not well-known for tolerating delayed gratification. Despite the momentous shift to online shopping, a trend already materializing pre-pandemic, consumer spending dropped drastically last year beginning with March. Interestingly at the same time, the personal savings rate skyrocketed, although unfortunately that ability to save was not equitable amongst all Americans. This leaves a large population of people who, once the economy fully reopens, will be eager to spend money in areas such as leisure and business travel, restaurants, concerts, weddings, clothing, and personal care services just to name a handful. The convenience of online shopping is certainly here to stay; however, I truly hope that people will find their way back to Main Street again in support of our local businesses. Of course, this is all dependent on the success of containing the spread of the virus through robust vaccination efforts currently underway.

When we inevitably do return to some semblance of normal and the economy does fully reopen, the roaring comeback for products and services especially in industries devasted by COVID-19 will ultimately bring with it more jobs and higher prices. Couple that with a supply chain that may initially struggle to meet the increased demand and you have a recipe for runaway inflation. Federal Reserve Chairman, Jerome Powell, recently addressed inflation concerns and affirmed his commitment to keeping interest rates low for the foreseeable future. He stated that he has no plans to raise rates unless we start seeing inflation get to undesirable levels, which he does not see happening soon.

In many ways, the pandemic accelerated already developing trends such as online shopping and remote work. This has fared well for the financial markets, and especially so for companies with fast and efficient online business models. Some experiences, however, cannot be digitized such as travel and leisure, and I expect to see a strong rebound in both areas this year as mass inoculations become more commonplace. Though, we may be in for an uneven recovery if vaccine distribution stalls in the coming months.

With a robust vaccination effort underway, I do think there is much cause for optimism despite the challenges we face ahead. As we move forward and begin to heal from the effects of the pandemic, it is my sincere hope that Washington and Americans across the country can come together and find common ground. That said, I expect to see a vaccine-driven economic recovery this year supported by additional fiscal stimulus, low yields, and contained inflation. Rest assured, as 2021 takes shape we will continue to apply careful, considered judgment to forecast and analyze coming developments and make informed decisions relating to the active management of our portfolios. As always, we encourage each of you to contact our office if you have experienced or anticipate a significant life change so we may plan accordingly.

Until we speak, I wish you the best of health.

Best wishes,

Steve LePage