Q: Passing a major infrastructure spending bill has been a big priority for the administration and Congress. What effect could this have on the economy, and which industries could potentially benefit?
A: Whether it’s roads, bridges and airports or enhanced cloud computing and broadband internet, better infrastructure means better connections, fewer hurdles, quicker time to market and stronger economic growth. Smart cities, the next great area of infrastructure development, will require major upgrades in data transmission capacity for healthcare and other industries. Another important area is sustainable infrastructure. Green tech may once have been seen as something that couldn’t exist without government subsidies. But as society prioritizes a response to climate change and places greater emphasis on moving away from reliance on hydrocarbons, renewable energy and other technologies represent significant long-term opportunities for investors.
Q: What other industries or areas of the economy might stock investors consider?
A: We believe that long-term investors should look for convergence points — key sectors that come together to create outsized growth potential. The best current example involves healthcare and technology, where laboratory science is converging with big data and the internet of things, creating opportunities for investors in companies that are innovating and bringing new products to market.
We also see opportunities in travel, leisure and entertainment as those industries rebound from the pandemic and consumer spending shifts incrementally away from goods and back toward experiences. That momentum could create a leisure and entertainment sector even larger than what existed prior to the health crisis.
Q: There’s also a lot of talk about tax increases these days. What might higher taxes mean for businesses, the economy and investors?
A: Markets have already factored in the likelihood of higher taxes on businesses and affluent individuals, with the expectation that political compromise will push the final numbers lower than the highest proposals now being put forward. While business taxes do pressure earnings, strong corporate profits this year will likely lessen the impact. Likewise, for individuals, studies show that in the long term, higher taxes don’t curtail investment. A capital gains tax increase could actually prompt people to stay invested longer.
We don’t recommend major portfolio changes based solely on taxes; the main thing is to keep your asset allocation and investment strategy aligned towards your goals. That said, now is a good time to speak with your tax professional and financial advisor about opportunities to be more tax efficient with your decisions. For example, a fixed-income investor might consider tax-exempt municipal bonds, but only after carefully considering whether the cost and yield make them attractive relative to taxable investments, such as Treasury bonds.
Q: At what point might federal spending and rising public debts become a problem for the economy and the markets?
A: At the moment, the Fed and the Treasury are not concerned about adding more debt because interest rates — the cost of debt — are currently low. The risk is if inflation rises uncontrollably and the Fed is forced to raise rates quickly. The cost of debt would rise and a flattening or inverted yield curve (when short-term interest rates move higher than long-term rates) could signal that we’re heading towards recession. Instead, what the Fed and Treasury expect is that inflation will stay under control, the cost of debt will remain relatively low and economic growth will generate higher cash flows to pay down the deficit and public debt.
Time will tell. One clue is the strength of the U.S. dollar, which signals whether foreign and domestic investors still have confidence in the dollar and in the U.S. economy’s ability to withstand higher debt loads. Concern over government spending is clearly putting some downward pressure on the dollar, but it’s very subtle. And the dollar, going back to 2018 and 2019, has been strong, so modest weakening is not a concern, at least for now.
Q: Are there other risks to the economy and markets right now?
A: Though no geopolitical crisis dominates headlines at the moment, problems from China-U.S. relations to tensions or conflict in the Middle East can arise quickly and cause disruptions. Another concern would be if new taxes come in significantly higher than expected. The market is already comfortable with some increases, but the highest proposals, if enacted, would force the markets to reprocess. A third risk we could see is higher regulation, which creates a backdrop of slower growth and can make things harder to get done.
Q: What steps should investors consider as they prepare for the road ahead?
A: The most important guidance may be to not overthink your responses to anything going on at the moment. For a long-term investor, success means being consistently good rather than occasionally great — following a strategy based on your personal goals rather than making precipitous changes in hopes of getting into or out of something at the perfect time. Your advisor can help you better understand how inflation, interest rates, taxes and other forces may affect your portfolio and suggest incremental adjustments, including rebalancing, to help make sure you stay on course as we move through the economic cycle.