Last Saturday my brother and I, with a couple buddies, did a winter mountain bike ride at Imagination Glen in Portage. The ride was a fun adventure, and a solid workout. A perfect way to spend a beautiful January afternoon in Indiana.
In the car on the way there and home the conversation drifted to current events. The week’s events in Washington, D.C. obviously came into the discussion. There were strong opinions about what had happened at the Capitol building, and what was happening in reaction. We were anxious about the possibilities of what could occur in the coming week, with theories and counter theories being thrown around.
As I considered the opinions being bantered, it occurred to me, I had had a really good bike ride and what I really wanted to do is go mountain biking again next weekend. I broke into the conversation and said, “Hey, regardless of what crazy stuff happens this week, if the weather is good do you want to ride again next Saturday?”
The conversation paused, we laughed and agreed that yeah, we would like to ride again, and we started talking again about mountain bikes, which was quite frankly a lot more interesting.
My point: the noise level coming out of Washington has become deafening. The primary political parties have slipped deeply into a chasm of dysfunction. Politicians have been positioned as heroes and villains in a made-for-TV drama that rivals an Avengers movie. They are neither. In my opinion, there is no way to stay healthy and simultaneously engaged in the drama anymore. Goodbye to Twitter, goodbye to Facebook, goodbye to Parlor. It's time to focus on important things. Work, family, markets and, yes, mountain biking all are more significant in daily life than Washington. We all need a collective break.
That’s not to say federal policy, especially tax policy, cannot impact our lives and finances, but the reality of this potential impact is far below the level present in the rhetoric. We will have a new government soon with the Democratic Party in control of the White House, and a razor thin margin of control in the Congress. Drama aside, what is this likely to mean from a financial perspective and how might this change impact policy effecting markets?
I’ve taken in a lot of analysis to become apprised of the possibilities, and formed some opinions regarding potential policy outcomes.
Under the current Senate filibuster rules, major pieces of legislation require a larger majority in the Senate. Despite the Senate filibuster rules, however, the Democratic Senate majority can still use “special budget procedures” to effect changes to tax policy with only a simple majority. These procedures were used to change tax policy under every President since Reagan, and it's reasonable to assume they will be used in the current environment.
Is this a disaster? No, it’s not. Democratic rhetoric regarding tax policy has been pretty consistent, and can best be described as “tweaks” around the edges, designed to extract more revenue from higher income earners. I never like a tax hike for anyone, but our economy has grown under the rates being rhetorically proposed before, and it's likely it can grow under these slightly higher rates again.
Furthermore, our nation and economy are still in the grips of the COVID crisis, and I would not expect any major tax changes to be effective in 2022. So, is a still theoretical tax hike that may not even go into effect until next year likely to move markets now? I don’t think so, I think investors have bigger fish to fry.
The biggest fish, in my opinion, is continuing federal stimulus of the economy, which, in my opinion, is likely to occur much sooner, and in larger scope, under the new government. As the rhetoric over last week begins to dissipate, I expect the focus in Washington to return to a COVID relief package which is likely to be well received by liquidity hungry investors.
Over the shorter term, I believe this could provide an additional tailwind to markets, and from there we will have to take policy changes as they come. The most important question is what am I going to do with all the time I wasted scrolling through Twitter?
Whatever it is, I’m sure it’ll be more productive.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC.