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.
- 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
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this informational piece. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information being provided herein. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971