Gill Capital Partners Thanksgiving Update
As we reflect on the past year, the team at Gill Capital Partners is incredibly thankful for all of you. We feel fortunate for the relationships we have with our clients, friends, partners, and colleagues. We hope everyone is able to give thanks with their friends and family this Thanksgiving. There is certainly plenty to talk about (hopefully not around the dinner table), from the infrastructure bill and its impact on tax law, to a brief summary of remarks from our recent speaker, Rick Pederson from Bow River Capital, to market updates and the ever-evolving situation with Covid-19. We will get into all of these, but first, a little humor for your Thanksgiving get-together.
Infrastructure Bill & Tax Updates
President Joe Biden signed a $1.2 trillion infrastructure bill into law on Monday November 15th, cementing a key part of his economic agenda. While the bill is technically $1.2 trillion, only $550 billion of it is “new spending,” as the rest was already accounted for in normal federal spending. The $550 billion of new spending will be spread across bridges, roads, transit and railroads, broadband, upgrades to airports, ports and waterways, and water and energy systems, among others. The spending is mostly paid for without raising taxes. The bulk of the funding comes from repurposing unspent coronavirus relief money and tightening enforcement on reporting gains from cryptocurrency investments. According to the Congressional Budget Office, the bill will add about $256 billion to the deficit.
Our view – This infrastructure bill, while still significant, is dramatically smaller than what was originally planned and much smaller than most democrats hoped for. The bill really only allocates $500 billion new dollars to infrastructure, and it does so over many years. So, while the spending is certainly needed, the impact will not be immediately or dramatically felt in the economy. To put this into perspective, between March of 2020 and March of 2021, our government spent nearly $6 trillion on various coronavirus relief and stimulus packages, most of which was delivered directly and immediately to the economy. The market views the infrastructure bill positively, as it does most government spending, but it is not going to have the power behind it as many had hoped. On the flip side, many are relieved that measures being proposed to pay for the infrastructure bill were removed from the final version. Proposals had ranged from higher taxes to reduced estate exemptions and really everything in between. The fact that no new taxes were added to pay for this spending was a huge victory for republicans and a relief for most high-income earners. Possibly the most significant new revenue addition is the regulation and enforcement of crypocurrency transactions. For the first time, investors will be required to report capital gains and disclose transactions in excess of $10,000 in cryptocurrencies. The lack of such oversight has been one of the main driving forces behind cryptocurrency, so it will be interesting to see how impactful this becomes.
Rick Pederson – Bow River – Overview and Key Take-Aways
Thank you to all of you who attended both in person and virtually to hear from Rick Pederson. We hope you enjoyed his insightful remarks. Below are a few high-level views that he shared and key take-aways.
Inflation – Yes, inflation is here. It should not be a surprise, and he anticipates it to diminish some over the next 12 months. The inflationary spike is largely being driven by rapid inflation in a few key areas including energy and both new and used cars. Rick also pointed out that we are still seeing offsetting deflationary pressures in other areas like clothing and technology.
Interest Rates – Rick does not believe that interest rates will move sharply higher as the Federal Reserve will likely not need to raise rates significantly, nor does it have the desire to embark on such a path.
Real Estate – Rick sees a continued trend away from mega-cities like New York, Chicago and Los Angeles in favor of places like Boise, Salt Lake City, and others in the mountain and mid-west regions that offer greater affordability and quality of life.
Outlook for markets – While inflation will continue to spook markets, Rick sees potential for continued growth in risk assets like equities and real estate, as interest rates are still extremely low and household balance sheets are historically healthy, both of which support consumer spending. However, he does believe that returns may be a bit more subdued over the next few years, as the federal government will not be injecting trillions of dollars of stimulus money into the system.
Market Update
Inflation is top of mind for many investors and analysts, as recent inflation numbers have shown inflation rates at the highest levels in nearly 40 years. Supply issues continue to be a source of volatility as the global economy reopens in a lumpy and frustrating manner for many. Furthermore, Covid-19 fears have not gone away. Spikes in different parts of the world are renewing fears of lockdowns; Austria announced this week that they will be returning to a countrywide mandatory 10-day lockdown, and it appears that other European nations may follow suit. Meanwhile, the stock market continues to generally shrug off bad news, and while markets have been down modestly over this past week, equity markets are still near all-time highs, propelled by a strong corporate earnings season, healthy consumer spending, and continued low interest rates.
Our view – The inflation headlines, while scary on the surface, are not overly concerning to us or to the markets, at least for now. Inflation numbers are high, but remember that current inflation is being measured against last year’s very low levels, so the numbers appear disproportionately large. We are not trying to minimize inflation or its impacts. We recognize that inflation, and particularly prolonged inflation, can be one of the most destructive economic forces. That being said, for now, we still believe much of this is transitory in nature. We believe that the Federal Reserve is being transparent, and they have been very clear that they do not have plans to aggressively increase interest rates. If this remains true, low interest rates will continue to provide a supportive environment for investors and the market structure as a whole. This is not guaranteed, but this is the backdrop we see today. We will continue to pay close attention to inflation, and will reassess our position if we feel it is warranted. In non-inflation news, we have been watching energy prices closely, and are relieved to see oil prices come down some in the past week. We believe that potential European lockdowns, combined with President Biden’s recently announced plan to tap the strategic oil reserve, will likely drive down near-term demand and increase near term supply.
We hope everyone has an excellent weekend and a happy Thanksgiving. Stay healthy and safe!
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.