Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, January 20th, at 11:00 AM in New York.
It's Inauguration Day. A Democratic administration takes the reins in the White House, as well as control of Congress. What should investors expect? Here's three key views and one wild card we're watching.
First, expect a lot more spending, which would boost growth in the near term, but dampen bond returns as rates move higher. The primary source of the spending will be on another round of stimulus to help relieve the economic effects of COVID-19. We expect this bill gets done this quarter, but after negotiation will be shaved down to $1T rather than the new administration's ask of $1.9T.
Second, expect higher taxes, but not as much as advertised, and not this calendar year. The new administration's supporting as much as $3T in new tax levies, but when filtered down to what can get sufficient votes in Congress, we think this number comes down to closer to $500B, with a focus on moderate increases on companies and high earners. And expect that the negotiation could take much of the year, pushing any increase to next calendar year, something Treasury Secretary nominee Yellen suggested at her confirmation hearing. Altogether, that means new government spending is still likely to outpace new revenue, keeping that aforementioned pressure on bond returns.
Third, expect the administration not to change direction on China. The previous administration spent much of the last year creating new nontariff barriers with China, such as export restrictions. These measures enjoyed bipartisan support, and so we wouldn't expect them to be rolled back unless a new comprehensive deal with China is struck, which is unlikely in the near term. So keep U.S./China policy on your radar as something that could affect the market outlook later this year.
As for that wild card, pay attention to the rhetoric on tech regulation. We still think Democrats have too many other priorities to give it focus this year, but crisis moments, such as the events of January 6, have a way of scrambling legislative priorities. So the tech sector could become more sensitive to lawmakers focusing their attention on social media.
Of course, the direction of events in D.C. can change in an instant, so we'll be vigilant and keep you informed.
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