On Corrections, Governmental Spending And Taxes

I'm going to give out a few quick comments this week on market corrections, the government and taxes.  

Last week I republished a piece on market seasonality.  I like to put it out every now and then to remind people that in a normal years there's an historic ebb and flow to market cycles.  A simple way to think about this is that there's times when money flows more easily into stocks than others.  We have now entered a period between now and sometime in the fall where money doesn't flow quite so readily into equities.  I point this out not because markets have to necessarily follow this pattern, but for you to know it's out there.  Think of this outline as a map, in this case a map of a river.  Let's say if a map marks that around a certain bend of a river that at certain times there's a sandbar.  Maybe it's not there every year.  Maybe it's there seven years out of ten.  Wouldn't you want to know about the possibility of it being there even if you round the bend and this year it doesn't exist.  I would.  Major indices are up around 10% in 2021 and are up an astounding amount since their lows last spring.  Given market seasonal patterns and also given the amounts of gains people are sitting on then probability would indicate this might be a spot where stocks could pause a bit.  There's no law that says this will happen but it's good to know the possibility exists we could hit a rough patch for no other reason then it's time for stocks to pause a bit.

Historically stocks experience a correction of between 7-15% in most years.  Now that doesn't mean it's going to happen in 2021 but that's what the numbers show.  Stocks can also mark time by doing nothing, trading in a choppy range while they work off their excesses.  That may also be what occurs in 2021 as the underlying fundamentals are still quite good.  All I'm saying is be aware of where we are in the yearly cycle and evaluate this along with your own unique risk reward criteria.  

The amount of ink that's been used and bytes consumed writing about the President's spending and tax proposals is enormous.  Most of it is the financial press needing something to write about.  What should investors do?  Well, I believe most investors should do nothing based on what's just proposals at this point.  Here's my thinking.  Whatever ultimately emerges isn't going to look anything like what the Biden Administration has been laying out.  It still has to get through the political meat cleaver that's Washington.  That doesn't mean there's going to be nothing.  There's clearly political consensus on an infrastructure bill.  It's just unlikely to be in the trillions that the President's asking for.  But making investment decisions on what's currently nothing more than proposals doesn't seem to me to be an efficient way to allocate capital. Better to wait and see what these spending bills look like as they're closer to becoming law.

Similarly there's much talk about capital gains rates changing.  They probably will.  However, until we know what's in that tax bill, it's hard to make any clear cut investment decisions.  In particular, it's hard to make decisions on capital gains until we know whether the bill will be retroactive to January 1 of this year.  If it is retroactive to 2020, then the time to sell was last year.  Besides, if the Administration holds to the income threshold of $400,000 for a sharp increase in capital gains rates then only a tiny percentage of investors will be impacted.  Also the average investor has much of their portfolio holdings in retirement accounts and there capital gains rates currently don't matter.     Besides many investors won't need to sell because they're happy with their portfolios no matter what.  So far, even with the talk of a wealth tax, you're only hit with taxes when you sell.  

Better to wait at this point to see how spending and taxes shake out then reflexively hitting the panic button and selling.  It could save you money down the road.