The first month of 2021 has proven that change is the only constant for the foreseeable future. We are still in the midst of a global pandemic. National governments have provided unprecedented fiscal and monetary support. Finally, the Democratic party has obtained a majority in Congress and the presidency, ushering in a new era for American politics.
President Biden proposed a $1.9 trillion stimulus plan, in addition to the $900 billion plan Congress passed a few weeks ago, which should help bridge the economic gap created by the spike in virus cases until most people are vaccinated.
Along with economic relief packages, we also expect some form of infrastructure plan to get passed in 2021. However, it is unlikely to be as large as the $2 trillion plan currently being discussed.
Since the Democrats control the House and the Senate, Congress will probably pass much of President Biden’s agenda; however, there are likely to be some changes since the Democrats only have a slim majority.
Investors are eagerly awaiting economic acceleration as more of the population receives the vaccine. Since election day, the stock market has rallied 13% in anticipation of this fiscal stimulus and for the economy to fully reopen.
While there is significant excitement surrounding economic expansion, President Biden is also expected to push for tax increases on corporations and wealthy individuals. These tax increases, along with the possibility of higher interest rates, may prove to be a headwind for the stock market and lead to a correction in the stock market, which could be compounded by new variants of COVID-19, which will slow the recovery,
The 10-year US treasury bond currently yields about 1%, which does not indicate a meaningful alternative to investing in stocks. However, if rates were to rise towards 2% or more, it will begin to signal a more substantial option.
Although current valuations are high by historical standards, they are not considered high relative to today’s long-term interest rates. If long term interest rates rise significantly, they will put some pressure on valuations.
In our opinion, we are optimistic that stocks will provide a positive return, even as bonds struggle to break even in 2021. We expect the Federal Reserve to keep the short-term interest rate at zero but expect the intermediate and long-term interest rates to rise, which is why we are less optimistic about bond returns for 2021.
We believe our clients should remain invested according to their current asset allocation, however favoring stocks and cash as bond rates remain depressed. We hope there are better opportunities to buy bonds at higher rates later in 2021 and 2022.
We look forward to working with you in the coming year and commit to always act in your best interests. We appreciate the trust and confidence you have placed in us.
Please feel free to call or email us with any questions, and Happy New Year!