Advisors and their clients should assume that everybody’s taxes will be increasing next year, regardless of whether the Democrats or the Republicans win big in the November elections, according to Richard Bernstein, CEO and chief investment officer at Richard Bernstein Advisors.
The number one question he and his RBA colleagues are asked now is “What happens if the Democrats win and taxes go up?” he said Wednesday during the webinar “Will the Market ‘Fall’ in the Fall?”
But that is the wrong question to ask, he said.
U.S. finances are “miserable” right now and the U.S. financial condition overall is “in horrible shape” due to the pandemic, he noted. And the Federal Reserve has been “printing money like crazy” and we have a huge budget deficit, he said.
“Taxes are going up” as a result, he predicted, adding: “I don’t care whether it’s a Democrat or Republican administration.”
That is because “we do not have any choice anymore — that’s the point that people are missing,” he said. Not helping any is that “foreigners are increasingly unwilling to fund our deficits and fund our growth and fund our consumption,” he noted.
So, either we “become a third-world country” or “we start paying” to fix the deficit and fund the growth ourselves in the U.S., he said.
Taxes will go up more if Democrats win in November, he predicted, but added: “Is that bad?” Not necessarily, he argued.
There has only been one situation in his career where the budget deficit was so large that taxes had to be increased to correct it, and that was in the 1990s, when the Clinton administration increased taxes, he pointed out.
And “that neither killed the economy nor killed the stock market,” which went up after the taxes were increased, he noted, but conceded there were no other cases to look back on.
Volatility to Continue
“We’ve obviously seen some recent volatility and I think the question everybody should be asking is” whether this is “something we’re going to have live with through the end of the year,” he said.
And the answer to that question is “I think there’s probably a fair chance that volatility will be higher,” he pointed out.
But there are “several things” that advisors and investors “should be looking for and observing as to try to gauge whether you should get more bullish or more cautious at any point in the next several weeks,” he told viewers.
In addition to what happens with taxes, there are four other factors that advisors and investors should take into account when trying to figure out if the market will fall this fall, he said.
Nasdaq Vs. Russell 2000
Of the other factors, the “big one” is what is happening with the Nasdaq, Bernstein said.
RBA has been pointing out to its clients that “the stocks of the exchanges are outperforming the stocks of the commercial banks” this year, he noted, saying he thinks that issue has “distorted” the Nasdaq.
“A good way to judge the temperature of the market … is to look at the performance of the Russell 2000” small-cap stock market index in the months to come vs. Nasdaq, he said.
“On days when Nasdaq outperforms, that says the market … is very pessimistic about the economy going forward,” he told viewers. On the other hand, “if the Russell 2000 is outperforming Nasdaq, the market actually has a very bullish assessment on the future of economic growth” in the country, he said.
That is because investors tend to only invest in the “Fab Five” tech stocks at high valuations on the Nasdaq and avoid all other stocks when they fear no other stocks will grow, he explained.
The U.S. Dollar
A weaker U.S. dollar is not always bad news. For example, in the U.S., it “would help corporate profits” and may also help global competitiveness, Bernstein said.
However, a “cascading” U.S. dollar that gets extremely weak would be an “extraordinarily bad sign, not only for the equity market, but for the fixed income market,” he warned.
Bernstein advised viewers to separate the politics of trade issues from reality. Therefore, it is important to be objective about what is happening with the U.S. trade deficit, which has continued to grow and even accelerate of late, he said.
That is because the U.S. remains overly dependent on other countries when it comes to consumer goods, he said.
Whether a trade policy is good or not is not the important issue to consider here, he said, explaining: “From my day job point of view, putting up trade barriers restricts the free flow of goods and services [and] what that does is it adds a level of inflation,” which could hurt consumer purchasing power.
Considering the current economic situation, a little inflation will be a good thing, according to Bernstein. However, he said, we don’t want it to “skyrocket.”
It would be “terrible” for the market “if inflation expectations started rolling over and playing dead again,” he said.
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