Market Update 5.31.22
Our Investment PerspectiveMay 31, 2022
Our primary focus in selecting and monitoring investments is on the merits and outlook of individual companies and industries, but we always keep an eye on policy decision making as well. Changes in government spending, taxes and regulation can have a significant impact on investments.
Lawmakers are frantically working on a modified version of “Build Back Better” while it can still be implemented using the reconciliation process. This bill includes additional spending for mainly climate and healthcare efforts with offsetting tax increases.
The latest proposal includes close to $1 trillion in new spending. It would extend the elevated subsidies for ACA (Affordable Care Act/’Obamacare’) participants and increase tax rebates for electric vehicle purchases, provided those vehicles are made with union labor. (You may be interested to know that Tesla cars would NOT qualify.) The plan also includes some price control measures for prescription drugs.
The offsetting personal tax increases are aimed at only the top-tier wealthy, but the corporate taxes would have a broad impact. A new minimum corporate tax rate, new taxes on global income, a tax on stock buybacks, and additional taxes on small business income would all have ripple effects. Companies that can raise prices to help offset the expenses will do so, leading to additional inflation. We are already in a bear market; increasing corporate taxes would further depress stock prices. The timing is not ideal.
One tax change in this plan has some support on both sides of the political aisle. The SALT (State and Local Tax) deduction would be increased from a cap of $10,000 to $80,000, with a phase out beginning at $750,000 adjustable gross income. Obviously, this change would be an additional expense of the plan, not a revenue enhancer.
We look at this policy proposal with an academic eye. How would passage affect our economic assumptions? Which companies benefit and which are harmed? How much of this is already expected and priced in? If the plan does not pass, how will our investments react? It has been instructive to watch specific segments of the stock market react to ebbs and flows of these debates.