Accelerating vaccination rates coupled with strong economic and earnings growth helped extend the rally in global equities in April. Emerging details of President Biden’s proposed spending plans and tax increases were received positively on balance. This bull market has been fueled largely by fiscal and monetary policy and, at least for now, investors appear ready for another sugar high.
Biden Spending Plan
On the spending side, the administration is promoting another nearly $2 trillion plan for improving infrastructure and accelerating the shift to greener energy. There is also a proposal called the American Families Plan, which would provide expanded free education and extend tax credits and savings for families with children. To pay for some of this, corporate tax rates would rise, and very high-income people would face higher marginal rates and increased capital gains tax rates.
A corporate tax increase could be a headwind for stocks in our view. Personal tax hikes will have more impact at the individual level for the small number affected. These proposals will face stiff opposition and are highly likely to change before being passed, if they become law at all, so we urge people not to overreact until there is more clarity.
Signs of ‘Transitory’ Inflation
Bond prices rose modestly as the Fed continued to reinforce its plan to remain highly accommodative with no interest rate hikes in sight. Chairman Powell said he believes increasing signs of inflation are likely “transitory.” A pause in higher yields supported growth stocks and momentum in the “reflation” trade stalled. In the six months leading to April, physical economy value stocks outperformed growth in general.
