We have been asked recently about our thoughts on the potential tax increases this year. Democrats want to pass a budget by the August recess, which we think is a pretty quick turnaround time. If they’re successful in getting the budget passed in July or early August then second step, the actual legislation, will move forward in September or October. The legislation will then have to put specific tax and spending increases to the top line numbers that were specified in the budget. While the market is viewing the law of the progress as a slowdown in momentum, we still do expect tax increases to pass by the end of the year. We do caution that the process may be messy, though, over the next couple months. Our base case remains that we will see a 25% corporate tax rate, up from 21%. We expect to see a 25 to 28% capital gains tax dividend tax top rate, up from 20% and a 39.6% highest personal income tax rate, up from 37%. In addition, we could see a modest estate tax change be enacted, but as always with politics in Washington, our thoughts may and probably will change some over the next couple of months, so, we’ll keep everyone updated regarding taxes.
Volatility and Inflation
What is normally kind of a behind the scenes topic that we really dig into because of how it impacts the bond market and stock market is really become a front page issue as people are seeing costs go up. This includes spending at the grocery store at the pump and housing. A few weeks ago, we talked about how lumber prices and copper started to turnover, so we wanted to go over a broader scope of commodity prices. As you can see, on this chart, lumber is down nearly 70%, steel is down nearly 17% and wheat and corn are down 15% and nearly 12% respectively. Those are very important inputs, but what’s also important to look at is how far they’ve moved above the 2016 to 2019 average. They’re still well above what was what was the pre-covid average price so that’s why you’re still seeing inflation pressures, even though prices started to come down. So, what we need to see from these prices for the Federal chairman’s be corrected that inflation is transitory which means it’s temporary. The big push was that inflation will come only because there’s bottlenecks in supply chain due to global coronavirus issues. As time passes, those bottlenecks should clear up and inflation should dissipate. We need to see this peaking where we’ve seen this turnover and prices continue downward. So, we saw the momentum on the upside and now hopefully we’re going to see momentum on the downside. This is also connected to the tax bill, where the average voter and consumers will unlikely be less supportive of higher taxes in a time period where they’re already seeing higher prices. It makes things like that much less popular and so DC is watching closely on the timing of tax bills and timing of spending bills. The consumers definitely watching it. You see things like corn and wheat and that’s the basis for a lot of our food even food you don’t eat. While you may not consume these things, other items you eat may, so it really affects the consumer. Also, companies profits are being driven by these prices. You’ll notice that average prices up double digits but the cost at the store aren’t up double digits because the corporations right now are eating some of these cost increases but they can’t do that forever. Eventually they’re going to pass on all this cost on the consumer so we’re really in this mid point where we got to see things kind of turn around and we’re confident that hopefully this momentum will continue and be very positive for the end of the year.
We are coming through mid year right now being a little bit past July and looking out towards the end of the year. We wanted to give a resistance and support level that correlate back to taxes and inflation and longer term approach. So, for the S&P 500, which is what we’re tracking, we’re looking at resistance level of 4500 right now with a support level of 4100. What that means for our resistance level is if we start to see the markets push up to that 4500 mark we could see a more bullish pattern. On the contrary, if we see a drop closer to the 4100 level, we might see more of a bearish pattern in the market so that’s something important to look out for going out towards the end of the year.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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