Broker Check

Both the Economy and Biden Administration Face Tougher Challenges Ahead

April 26, 2021
Share |

Both the Economy and the Biden Administration Face Tougher Challenges Ahead

  • The economic recovery remains intact through the first 100 days of the Biden administration

  • Tougher challenges lie ahead.

  • In uncertain times, your financial professional can help you stay focused on your long-term goals


As 2021 progresses, we continually monitor the recovery and the new administration’s policies and agenda. While we have said in the past that presidential administrations have some impact on the economy and markets, there are larger forces at play like global trade and monetary policy. However, presidential administrations do have some impacts so we are watching it closely for clues on what may lie ahead. So far, the new administration has benefited from the current economic cycle/post-recession recovery, which has been front-end loaded, and has seen a surge in good news on nearly all points – from key consumer metrics like sentiment and retail sales to many important business metrics. And let’s not forget the labor market is improving nearly every week. Looking ahead, however, the economy faces some headwinds as it is showing signs of transitioning from its current early cycle recovery to a mid-cycle one facing tougher year-over-year comparisons. Let’s also not forget rising inflationary pressures, China reducing its stimulus, and the potential of higher taxes, which we discuss below, may also impact this recovery.


This economic cycle that we are in now is very similar to the first 100 days of the Biden administration as they have both been front-loaded with positive news. The Biden administration also started quickly with the passing of the $1.9 trillion American Rescue Plan. Unlike most bills, this was swiftly passed in Congress with relative ease. Like the economic cycle progressing and facing a difficult road ahead, Biden’s next attempt at stimulus, the Infrastructure Bill, faces big headwinds such as a lack of bipartisan support and concerns around how to pay for it that will create challenges.


Similarly, the doses of vaccines being administered accelerated at a robust pace. By early April, more than 3 million Americans were vaccinated daily, exceeding vaccination targets. Lately, however, there has been a clear slowing of vaccinations/doses being administered that seemed to have peaked right at the time that the Johnson & Johnson vaccine was temporarily taken off the market. With concerns around blood clots, apprehension, especially among the under-65 age group, of vaccines is rising. Positively, more than half of adults in the U.S. have received at least one COVID-19 vaccine dose and more than a third of adults have been fully vaccinated. On the other hand, it is estimated that around 75% of the population will need to be vaccinated for herd immunity to take effect.


Recently, the Biden Administration surprised the financial markets with a proposal to raise the capital gains tax rate for people that earn $1 million or more in income. However, was this really a surprise? During his campaign, he telegraphed his plans to raise taxes on the top 1% of income earners and this announcement is consistent with that message. According to the Federal Reserve, households in the top 1 percentile of income own about 45% of all U.S. corporate equities and mutual fund shares. That concentration is why a tax applied to a very narrow slice of U.S. households led to the recent abrupt market selloff. The positive market move that ensued is likely investors realizing this was not a surprise, given Biden’s campaign, and, more importantly, raising the capital gains tax rate faces a long and uncertain path through Congress. At this time, this tax change will not likely pass
in its current form for three reasons:

  1. this is a large increase and will likely be lowered; 

  2. Republicans will not go along with it and even some Democrats may not be on board, though they could be persuaded if the tax change includes a removal of the SALT tax cap;

  3. though the economic recovery is broadening, this could hurt the delicate balance.


Lastly, speaking of the financial markets, investors reacted positively to Biden’s announcements and stimulus bill in the first part of the year. Equities rallied and bond yields surged in anticipation of good times ahead. Lately, this has not been the case. After the first quarter rally in economically sensitive asset classes and sectors like value, small cap, financials, industrials and materials, there has been a sharp reversal lately as growth and technology have taken the lead as investors begin to question economic growth and focus on the economic cycle shift from early recovery to mid-recovery. Similarly, bond yields surged in the first quarter. However, slowing growth prospects have begun to pressure yields.


Going forward, new agenda items will likely require the Biden administration to compromise with a deeply divided Congress. Biden’s campaign promise to unite the country may prove to be his most difficult promise to fulfill. In these times, your financial professional can help you stay focused on your long-term risk and return goals and help you with your personalized investment objectives. 

____________________________________________________________________________

This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.

About Cetera® Investment Management
Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera Financial Group®. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers. 

About Cetera Financial Group
“Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), Cetera Financial Specialists LLC, and First Allied Securities, Inc. All firms are members FINRA / SIPC. Located at 200 N. Pacific Coast Highway, Suite 1200 El Segundo, CA 90245-5670


Disclosures
Individuals affiliated with Cetera firms are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services. The material contained in this document was authored by and is the property of Cetera Investment Management LLC. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by affiliated and non-affiliated registered investment advisers.

Your registered representative or investment adviser representative is not registered with Cetera Investment Management and did not take part in the creation of this material. He or she may not be able to offer Cetera Investment Management portfolio management services. Nothing in this presentation should be construed as offering or disseminating specific investment, tax, or legal advice to any individual without the benefit of direct and specific consultation with an investment adviser representative authorized to offer Cetera Investment Management services. Information contained herein shall not constitute an offer or a solicitation of any services.

Past performance is not a guarantee of future results. For more information about Cetera Investment Management, please reference the Cetera Investment Management LLC Form ADV disclosure brochure and the disclosure brochure for the registered investment adviser your adviser is registered with. Please consult with your adviser for his or her specific firm registrations and programs available. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context.

All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision. All economic and performance information is historical and not indicative of future results. The market indices discussed are not actively managed. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards. A diversified portfolio does not assure a profit or protect against loss in a declining market.