The new U.S. president is venturing a huge expe-riment with his spending policy. But investors even forgive him tax increases.
“Sleepy Joe” my ass. That’s what Donald Trump liked to call his challenger Joe Biden during the election campaign. And even his supporters were worried that he might be a weak candidate because of the 78-year-old’s reserved demeanor and advanced age.
But since taking office, the U.S. president has not let a minute go by: first a nearly two-trillion-dollar economic stimulus program, now an infrastructure program that is also partly a social program, for example to improve health care. In addition, there is spending on climate policy.
Biden wants to recoup some of the spending through higher taxes. On Thursday, the markets reacted with uncertainty when new plans to tax very wealthy investors leaked out.
Investors are asking: Will Biden’s policy continue to work for the markets? Investment expert Pilar Gomez-Bravo of fund company MFS sees Biden’s policy as an “experiment.” The markets seem to think it’s working. In any case, they’ve already taken Biden’s tax plans in stride twice.
Higher taxes for companies and shareholders
First, the U.S. president proposed raising corporate taxes from 21 to 28 percent, partially reversing the cut made by his predecessor. The increase would have a direct impact on corporate earnings per share. However, the stock market quickly shrugged off the news. It was masked by the prospect of rising profits due to the opening of the economy, made possible by a successful vaccination strategy already introduced by Trump. Attention is mainly attracted by stocks that benefit from a pickup in consumer sentiment.
On Thursday came the next blow. It is aimed directly at investors. The proposals include raising the marginal tax rate from 37 to 39.6 percent. For people with incomes of more than a million dollars, the tax rate on capital gains is also to almost double to 39.6 percent. Because there is also an additional tax on investment income, the total tax burden will rise to over 40 percent. In addition, there is talk of also taxing the capital gains of the previous owner in the case of heirs.
Calm on the bond market
A few weeks ago, the unease came from a different source, but one that was also related to Biden’s policies: the bond market. The administration’s spending plans raised concerns, supported by well-known economists such as Larry Summers and Olivier Blanchard, that inflation could get going. U.S. government bond yields rose sharply. But in part, says expert Gomez-Bravo of fund manager MFS, this rise is a premium for the risk that the great experiment will not succeed. Recently, however, the bonds have calmed down again. The yield on the 10-year paper is hovering between 1.5 and 1.6 percent, having previously run up toward 1.8 percent. Gomez-Bravo com-ments, “We see higher U.S. yields over the long term, but not an uncontrolled rise.”
So, taking the big picture, we see that U.S. equities are benefiting greatly from Biden’s policies, and for good reasons. At the same time, though, the question is whether investors should be so carefree in their confidence that the great ex-periment will succeed.
How can investors position themselves?
Those who believe in Biden’s strategy can very easily bet on the U.S. stock index S&P 500 with an exchange-traded fund (ETF).
Goldman Sachs analysts recently made a recommendation specifically for the sector labeled “consumer discretionary,” which is consumption that is not for daily needs.
JP Morgan recommends betting that the very broad U.S. stock index Russell 2000 will outperform the tech index Nasdaq: In a broad economic recovery, small stocks in particular will benefit. JP Morgan is also betting on financials and energy, among others.
U.S. policy has global implications. DZ Bank sees good opportunities for German carmakers, mechanical engineering and the pharmaceutical industry to participate in the American upswing. With a share of 8.1 percent of German exports, the U.S. was the most important customer for local companies in 2020, ahead of China, France and the Netherlands. Indirectly, therefore, the German stock market will also benefit.
Conclusion: America remains a great adventure for investors. What is interesting, however, is that Biden is working flat out to implement his election promises and, despite his high willingness to take risks, is also making sure that the programs are coherent. As the Wall Street Journal recently analyzed, he is focusing on demonstrating excellence on the world markets in some sectors and at the same time using the service sector as a job machine, among other things through higher health care spending.
services sector as a job engine. If this succeeds, investors will also feel it.