The attempted insurgency in Washington last Wednesday was deeply disturbing. The television coverage of the rioters who broke into the Capitol building, smashed windows and threatened lawmakers was a drama of a kind we never thought we would see in the United States.
The riot, which led to five tragic deaths, was prompted by Donald Trump’s obsession that the election was somehow stolen from him and his ability to convince millions of Americans of this absurdity, despite all the evidence to the contrary.
Thankfully, law enforcement finally prevailed (after a ridiculously slow response time) and Congress was back to work within hours.
The news made headlines around the world. But despite its long-term political consequences and historical implications, it wasn’t the only significant US political story of the week. The other was the Democratic sweep of the second round of Georgia’s senatorial elections on Tuesday, which ended Republican control of the Senate and paved the way for many of Joe Biden’s sweeping reforms.
US markets reacted surprisingly strongly to the Georgian crisis, with the Dow Jones gaining 438 points on Wednesday, the day the results were confirmed (and the same day as the Washington riot).
Georgia’s result creates a 50-50 tie in the Senate. But new Vice President Kamala Harris will cast the deciding vote in the event of a tie, effectively giving the Democrats control.
Wall Street’s reaction is a bit confusing. After last fall’s election, stocks rose as it looked like Republicans would retain control of the Senate by a razor thin margin. The theory was that the stalemate in Washington would be positive for stocks because Senate Republicans would block many of Joe Biden’s policies seen as hostile to business.
The first of these is Mr Biden’s pledge to partially reverse Donald Trump’s tax cuts, which gave markets a huge boost when they were enacted in 2017 (for fiscal year 2018). Much has been said about Mr. Biden’s proposal to raise the corporate tax rate to 28 percent (from 21 percent now). But his plan goes far beyond that. If fully implemented, marginal rates for high-income earners will increase, deductions will be reduced, long-term capital gains tax will be increased, and social security taxes will increase.
None of this will appeal to Wall Street, or many people. But the odds of that happening were greatly increased by Georgia’s vote.
So, with tax hikes coming up, what is it that got the markets so excited that even an attempted insurgency couldn’t slow it down? It seems that the new taxes come with billions of dollars in new spending to stimulate the economy.
The centerpiece is the new president’s plan to spend US $ 2 trillion on infrastructure projects during his first term. It’s a very ambitious program that includes, according to its campaign site:
- Transform crumbling transport infrastructure, including roads and bridges, railways, aviation, ports and inland waterways.
- Develop the “second great rail revolution”, with a focus on improving rail safety and speed while reducing greenhouse gas emissions through electrification.
- Invest in ‘high quality and reliable’ public transport in urban areas.
- Develop “100%” clean energy savings.
- Replace aging water lines and make sure every American has access to clean drinking water.
- Bring broadband to every home (21 million Americans don’t have now).
In addition, there will be new credits for first-time home buyers (ideal for the housing industry). His plan also includes restoring credits for purchasing electric vehicles (good news for Tesla and other EV makers) and introducing tax breaks for emissions-reducing investments in residential and commercial buildings.
Ambitious? You bet. Feasible? Some of them now that the Democrats have control of the Senate. But not at all. It is a program for a generation, not for a single presidential term.
But if even a quarter of Mr Biden’s plan is implemented, it will be a huge boost to the economy. Relief from the coronavirus outbreak would further enhance economic gains. With bonds offering low yields and little upside potential, you can see why stocks are booming.
More and more analysts are starting to use the word “bubble” to describe what is happening in the stock market. Jeremy Grantham, a well-respected UK fund manager, said last week that the markets were in an “epic full-blown bubble” that would eventually burst.
When? This is anyone’s guess. But this irrational exuberance cannot last forever.
So what does this mean for your investments? If you own stocks that have seen big gains in recent months, you may want to consider taking a profit by selling some of your holdings. If the money is in a non-registered account, consider the consequences for capital gains, keeping in mind that you won’t need to report the profits until you file your 2021 return. .
Low risk stocks such as utilities and telecoms are likely to fall in the event of a massive market sell-off, but any losses should be temporary and dividends should continue to flow. Keep these positions.
Continue to hold gold and / or gold stocks to hedge against inflation, which could see a resurgence given massive government stimulus packages.
Bonds and bond funds are likely to offer little return and pose risk if interest rates rise. But keep a small stake in fixed income for stability and in the unlikely event we go to negative interest rates.
In short, don’t do anything drastic. But if so, collect some cash and be prepared to take advantage of a withdrawal if it does.
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