$6.5 trillion of additional federal spending has passed or debated this year.
To put this issue in perspective, the U.S. Federal annual budget was $4.3-4.5 trillion with a $600 billion structural deficit pre-pandemic. In March 2020 when the pandemic was taking hold, Congress passed, and the President signed the CARES Act providing $2.2 trillion of direct support to the economy in the form of payments to individuals and businesses. In early 2021 when the economy was recovering, the $1.9 trillion AMERICAN RESCUE PLAN was signed into law with appropriations of $1.5 trillion allocated for 2021 and 2022. Congress is debating a $1.1 trillion infrastructure bill and another $3.5 to $4.0 trillion bill to expand entitlements and climate initiatives
How will the U.S. Government pay for this massive spending you may ask?
What comes to mind is the image of the scarecrow in The Wizard of Oz with his arms crossed, totally perplexed, not knowing the way to Oz. Undeterred, he joined Dorothy for his journey to Oz. Many proposals were floated including eliminating the investment stepped-up basis and taxing unrealized gains for estates. Recently, a 3.8% tax on unrealized gains for billionaires was proposed and scrapped within days. Corporate income taxes will likely increase from the current 21% statutory rate. Major economies around the world impose corporate tax rates between 20-25%. U.S. corporate tax rates could increase modestly and remain competitive on a global basis. In summary, Congress appears to be in a logger jam with spending programs and tax reform.
Inflation is alive and well with consumer prices up 5.4% and producer prices rising 8.6%, well higher than the Federal Reserve “FED” 2.0% inflation target.
Everyday workers take the biggest brunt from inflation. Wages are rising by 4.9% and being wiped out by rising prices. Investors are not immune either. The degree to which stock markets’ total return exceeds inflation typically declines. If the above noted spending programs are passed into law, we believe these spending programs will ensure inflation will remain well above the FEDs 2.0% target.
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).
PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES