Advisor Talking Points: Despite The COVID Crisis, The Larger Economy Is Coming Back
Year-to-date, the S&P 500 Index is flat at -0.19%, and for the past year, it is now up 8.05%. The tech-heavy NASDAQ index is up year-to-date 17.06%, and it is currently up 28.32% for the past year.
As you can see from the graphs below of the S&P 500 Index, the NASDAQ Index and the ECRI Weekly Leading Index of leading economic indicators, both the stock market and the broad economy are in the midst of a V-shaped recovery—or as some people call it, a “Nike Swoosh-like” recovery.
The overall, broad economy is clearly coming back and expanding, but, in the last few weeks, you can also see from these charts they are starting to plateau and move sideways. I am afraid we may see this directional, sideways trend continue in both the stock market and the economy if we can’t stop the spread of the Coronavirus pandemic because some selfish Americans refuse to wear masks and social distance.
If large numbers of people continue to exacerbate the spread of the virus by not wearing masks and social distancing, I am afraid this will be the primary cause of slowing down the economic recovery over the summer and up through the election.
Why Is It So Hard To Get Americans To Defeat The Virus AND Reopen The Economy?
Why would anyone want to prolong both the physical and economic pain caused by this pandemic?
Over the summer and fall, we may see pullbacks in the reopening process and maybe a few targeted lockdowns to contain a second wave, but in the long-term, the economy will continue to expand.
Here are a few examples of recent economic news and trends:
- Congress and the Fed are pumping massive amounts of stimulus money into the economy.
- Asia and Europe are injecting historically large amounts of stimulus into their economies.
- Unemployment will continue to trend down.
- Most scientists believe we will have an effective vaccine in 2021.
- Retail sales rose 7.5% in June and are higher than pre-pandemic growth.
- Consumer confidence and homebuilding confidence have recovered.
- U.S. total industrial production in June posted its most significant gain since 1959.
- Housing starts are up.
- U.S. manufacturing has returned to pre-pandemic growth.
- Shipping has returned to pre-pandemic growth.
- U.S. vehicle production has returned to pre-pandemic growth.
If Biden Wins, Can The Democrats Raise Taxes?
In a speech last week, Joe Biden pledged to raise taxes back to the previous Obama-era tax rates, thereby nullifying the Trump tax cuts.
There are three reasons why Wall Street analysts believe that would be unlikely:
1. The Trump Tax Cuts Were Middle-Class Tax Cuts
In my conversations with Wall Street analysts, all of them felt that if Biden is elected, his first priority will be to get the economy recovering to where it was in 2019. They all believed a severe increase in taxes, and regulations would work against that goal.
Given the current economic weakness, business recovery and job growth are likely to be prioritized over policies that dampen economic growth and perhaps even jeopardize the Democrat’s desired 2022 mid-term election outcome. If the Democrats try to take away Trump’s middle-class tax cuts, they risk losing the U.S. Senate and possibly the U.S. House.
Most Americans realize that if the Congress cuts taxes by, say 8%, wealthy individuals and corporations that pay more taxes will receive a larger refund than a regular middle-class taxpayer.
But most people don’t wake up in the morning and compare themselves or their tax rates to Warren Buffett or Bill Gates. Most Americans ask themselves if they have more money this year rather than last year because of the tax cuts. The Trump tax cuts were some of the most substantial middle-class tax cuts in U.S. history. There would be enormous political pushback by working-class Democrats against raising their taxes.
2. If Democrats Controlled The Senate, Could They Pass A Tax Increase?
Because of arcane Senate rules, it would be very difficult for Democrats to pass a new tax increase.
Senate rules allow for judicial nominations for federal judges and Supreme Court nominations to pass with a simple majority vote of the Senate.
However, for other legislation, if there is no objection, the bill can pass with a simple majority vote.
But if a senator threatens a filibuster, the vote for that piece of legislation can’t take place until 60 members of the Senate agree. It is called a “cloture vote,” and the Democrats would have to find 60 votes in the Senate to bring up the bill for passage.
According to the polling at RealClearPolitics.com, most analysts believe if the election were held today, the Democrats would have a Senate majority of 53 versus 47 Republicans. To win a cloture vote, the Democrats would have to convince seven Republicans to raise taxes, and that is highly unlikely.
So How Did Obama Raise income & Corporate Taxes?
He didn’t! The Bush Tax Cuts were set to expire, or “sunset” in 2010 and President Obama just let them expire and go up.
So How Were The Trump Tax Cuts Passed In The Senate Without 60 Votes?
Senate Majority Leader Mitch McConnell used two arcane Senate rules to get around the filibuster and cloture rules.
Without a single hearing held, the 400-page House bill was passed two weeks after the legislation was first released.
The Senate characterized the bill as a “budget reconciliation vote” rather than an ordinary piece of legislation.
To circumvent a Democratic filibuster and the need for 60 votes to stop it, Senator McConnell invoked a complicated and little-used rule known as the “Byrd Rule.” If a budget reconciliation meets the conditions of the Byrd Rule, it only takes 51 votes in the Senate to pass.
I won’t go into all the obscure conditions required of the Byrd Rule. Still, critical provisions on future spending and future revenues required the bill’s sponsors to agree that the Trump Tax cuts would expire or “sunset” in five years in 2025, to pass under the Byrd Rule.
By using the budget reconciliation rules and the Byrd Rule, Senator McConnell was able to pass the Trump Tax Cuts by a simple majority vote.
The bottom line to understanding all of this mind-numbing parliamentary detail is that most Congressional legislative experts believe it would be harder to use these rules to raise taxes. The Senate Rules were designed to make it harder to raise taxes than to lower them.
3. Why Raise Taxes When The Fed Can Just Print The Money?
The final reason Joe Biden is unlikely to raise taxes is that the Republicans have shown the Democrats they can just ask the Fed to print money by selling 30-year Treasury Bonds at almost no interest cost to the U.S. Government and suffer no political consequences.
Why upset your constituents by raising their taxes, when you can pay for all your crazy projects by printing money?
As most economists say, “we have 30-years to figure out how to repay all of this borrowing.”
I feel sorry for most millennials because the joke’s on them. No one has told them yet that they get to pay the bill for all of it.
For those of us who are babyboomers, we will all be dead by the time this debt has to be paid off.
THAT’S THE GOOD NEWS!
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Paul Dietrich is the Chief Investment Strategist for B. Riley Wealth Management. B. Riley Wealth Management offers comprehensive financial solutions to clients through its network of over 160 experienced financial advisors across 13 states. The firm manages more than $11 billion in client assets and serves approximately 34,000 client accounts.