Flower gardens are blossoming and baseball season is under way. Lately we've heard questions from investors about whether inflation and capital gains tax rates could bloom or zoom out of the park, too. A few thoughts might help put things in perspective.
Keeping inflation in check
While there’s been talk that an economic recovery and federal stimulus money could cause inflation to overheat, we think any uptick could be fleeting. Factors including slack in the labor market and uneven economic growth worldwide could limit inflationary pressure.
Capital gains taxes
As President Biden tries to make good on his campaign pledge to raise capital gains tax rates for top earners, more investors may dump stocks. But the news about capital gains tax hiked may not be all bad: The last one was in 2013 and the S&P 500 Index gained nearly 30% that year.¹
Fast start for the U.S.
The U.S. economy did better than expected in the first quarter, with real gross domestic product (GDP) increasing at an annual rate of 6.4 percent.² That came even though not all cities have lifted COVID-19 restrictions. Consumer spending, the largest component of GDP, is growing against a backdrop of rising vaccination rates, nearly $3 trillion in fiscal stimulus and job growth.
Watch for growth
Many market participants may be underestimating the power that vaccinations and looser social distancing mandates have to rev corporate earnings in the near term. We expect analysts to raise earnings estimates and price targets over the coming quarters – which could push stock prices even higher
We have repositioned portfolios to take advantage of the cyclical rotation from growth to value. We have also added a position in commodities/materials to hedge against potential inflation concerns. In fixed income we have shifted some of our exposure from government bonds into strategic income in an attempt to capture some better yields. These asset classes may have been vulnerable during COVID-19 shutdowns. But their disproportional exposure to pent-up consumer demand puts them in position to capitalize on a return to normalcy.
We’ve compiled a few more details on each of these topics here Quarterly Update Q2-2021 and as always, if you want to talk about any of these items more in depth, reach out. We’re here for you.
1.The Street, April 29, 2020.
2. Bureau of Economic Analysis, April 29, 2021