Government Spending and the Market’s Reaction

May 7, 2021


By Tim Courtney, Chief Investment Officer

Last week, President Biden proposed the latest portion of his economic recovery package – the $1.8 trillion American Families Plan which includes provisions for paid family and medical leave, an extended child tax credit, and tuition-free community college and preschool.1 This followed the proposal of a $2.3 trillion infrastructure plan, the American Jobs Plan, and the passage of the $1.9 trillion COVID-19 relief bill, the American Rescue Plan.

Before any COVID-19 relief measures, the U.S. government’s (federal, state and city) total expected spending for 2021 approached $8 trillion.2 If these two outstanding spending initiatives are enacted as proposed, this year’s total government spending would close in on $14 trillion.

This spending, coupled with what was already expected to be a strong economy, has caused the markets and companies to become more concerned about rising input costs. Inflation has averaged 1.75% for the past decade, under the Federal Reserve’s 2% target.3 Rising inflation expectations though, along with disrupted supply chains and labor shortages, have caused the prices of several commodities and wage costs to move meaningfully higher.4,5 At the end of 2019, Treasury bond prices indicated a forward 10-year inflation rate of about 1.75%. Expected inflation fell as low as 0.50% in March of 2020 but has since risen to 2.51% today.6

When we talk about increasing spending, we must also talk about taxes. The American Families Plan proposes raising the corporate tax rate from 21% to 28% and the capital gains tax rate from 23.8% to 43.4% for individuals earning more than $1 million.7

While the capital gains tax rate change should affect relatively few people, we could see an impact on the markets in the short term. Investors holding appreciated assets for which they don’t have an affinity are now more incentivized to expedite selling. They may also decide to sell appreciated assets they want to hold, lock in lower capital gains rates before they rise, and then buy the asset back with a reset cost basis. This could create some churn and volatility in markets as people reposition their portfolios.

The American Families Plan is also calling for the partial removal of the step-up in basis.7 Appreciated assets currently transfer to heirs without capital gain. This change would collect taxes on unrealized gains over $1 million at death with certain exceptions. This may cause some to rework their estate planning and reposition portfolios, again impacting near-term market volatility and pricing.

We do not believe these changes will cause high-net-worth investors to avoid markets and move to cash. As these changes have been discussed, some market prices have barely moved. Still, until we find that elusive free lunch, the spending will have near-term benefits along with longer-term costs.

We continue to monitor these proposals for their potential impact on portfolios and planning. If you have any questions about how these policies could affect you, please feel free to reach out to your Exencial advisor.


1. The Wall Street Journal (4/28/21) – What’s in Biden’s American Families Plan? From taxes to child care
2. U.S. Government Spending (as of 3/17/21) – Total 2021 spending by function
3. US Inflation Calculator (data as of 5/4/21) – Historical inflation rates: 1914-2021
4. CNBC.com (3/27/20) – Coronavirus stimulus just pushed Fed’s balance sheet past $5 trillion for the first time ever
5. CNBC.com (4/28/21) – Fed holds interest rates near zero, sees faster growth and higher inflation
6. Treasury.gov (5/06/21) – Data: Daily Treasury yield/Real yield curve rates
7. The White House (4/28/21) – Fact sheet: The American Families Plan

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