- With Biden’s first 100 days in the books, investors remain worried about inflation, taxes, etc.
- Despite investor concerns, two Natixis Investment Managers remain bullish.
- They think there’s still plenty of upside ahead in equities, corporate bonds, and more.
Investors have to be pleased with President Biden’s first 100 days in office. The stock market enjoyed stronger gains relative to any other president since World War II, while a comprehensive vaccine rollout and plans for aggressive fiscal stimulus continue to keep the rally alive.
But there are still plenty of questions on investors’ minds over inflation, rising rates of infection in India, and geopolitical tensions between the US and China.
Esty Dwek and Lynda Schweitzer are no strangers to the issues investors face. Dwek is the head of global market strategy at Natixis Investment Managers, while Schweitzer is the co-head of the Loomis Sayles global fixed income team. Both are well-versed in the risks of today’s market, and both are confident that the market can continue to rise over the coming months.
In a live webinar on Tuesday, Dwek and Schweitzer discussed Biden’s first 100 days in office, his plans to raise corporate and capital gains taxes, and how investors should approach the market.
Biden’s off to a strong start
Overall, both Dwek and Schweitzer are impressed by Biden’s first 100 days in office. Schweitzer noted that “the ability of Democrats to take the House and Senate opened the door for more aggressive fiscal stimulus,” and that Biden has used this to “impact growth in a very positive way.”
Biden's biggest initiatives in his first 100 days have been his infrastructure plan and his tax plan, the latter of which sent markets spiraling last week. Investors were spooked by the potential for a total tax rate as high as 43.4% on capital gains, but Schweitzer isn't worried. She says that the policy likely won't be as impactful as the headlines.
"We'll likely get an increase, Biden's been clear on that," said Schweitzer. "But it's likely to not be as much as he asked for."
In short, says Schweitzer: "Maybe equity markets might wobble, but over the long run you're better off holding equities than selling to avoid capital gains taxes."
Dwek agrees, saying that Biden has always been clear that he wants to raise taxes on the highest earners.
As for an increase in corporate taxes, Dwek thinks that the number here will ultimately be lower than Biden's original 28% ask. "The assumption from the market is you don't get higher than 25% on corporate tax," Dwek says, noting that's still higher than it was before the Tax Cuts and Jobs Act of 2017.
Dwek isn't sure where corporate tax rates will eventually land, but she does have some estimates for how it will affect equity markets. "If Biden gets everything he's talked about you're talking 7% to 8% cuts to EPS expectations for next year," she said. "If he doesn't get everything it's closer to 4% to 5%."
Over-inflated concerns
While taxes have been top of many investors' minds lately, inflation is never far behind. But both Dwek and Schweitzer are confident that the Fed is on top of inflation. In fact, Dwek says that "the Fed wants to be behind the curve, it wants inflation to be higher than it has been over the last ten years."
"You probably need six months of well above 2% to start to have the Fed worry about if this is persistent and not transitory," she added, saying that "beyond the second quarter we don't see spiraling inflation." Schweitzer agreed, noting that the Fed's "messaging has been consistent around inflation" and that it "will let inflation run hot."
"We think inflation will move back towards 2% by the end of the year and be slightly under that by 2022," Schweitzer said. She went on to say that she thinks "full employment comes at the end of 2022, and that "the Fed will begin to taper in early 2022."
Investing beyond Biden's first 100 days
With Biden's first 100 days in the rearview, Dwek and Schweitzer believe that there are plenty of opportunities for investors ahead. Dwek is unconcerned about a stock market bubble, noting that "this talk of all-time highs is more about the headline. You have to reach an all-time high if you want the market to move forward."
But Dwek cautions investors to not get too cocky. "Don't ignore risks, don't think that nothing can go wrong," she warns. "You don't want to fall into complacency."
In spite of her warnings, Dwek says that the "fundamentals are still there." The combination of increasing vaccination rates, a broad earnings rebound, as well as fiscal stimulus and monetary easing all make Dwek think that the market still has room to run. "I don't think higher valuations on their own are an obstacle. It's more a question of positioning and sentiments."
As far as positioning is concerned, Dwek believes that the rotation to economically sensitive stocks will resume in the next few months.
"We try to think in terms of cyclicals and defensives rather than purely growth and value," says Dwek. "There's a lot of potential for catch up for cyclical sectors that will benefit from the reopening trade." While not recommended by Dwek, the Vanguard Consumer Discretionary ETF is one example of a fund that tracks a sector with a cyclical tilt.
Dwek is particularly interested in "mega-trends that are going to be long-term secular winners" such as tech, healthcare, and ESG investments.
She also believes that office space and commercial real estate won't be "as much of a loser" as people thought they'd be. A year ago many people thought we'd never return to offices, but "now we're thinking please let us go back to the office. We're not going to move away as much from offices as we would've thought a year ago."
Schweitzer is also bullish overall. She says strong earnings for corporations should aid their credit spreads, and she is slightly overweight corporate credit.
In addition, Schweitzer is overweight some corporate bonds, notably banks and insurance companies with higher rates.
Outside of the US, Schweitzer's team is overweight on Mexico. She believes that as supply chains around the world are revamped and relocated, and as the US' rivalry with China picks up, Mexico is an obvious choice to benefit from these trends. The iShares MSCI Mexico ETF tracks a broad range of the country's stocks.
Schweitzer also expects the dollar to be under pressure later this year, which is why she favors non-US currencies. "We like non-dollar FX positions not tied to global growth," Schweitzer says, warning that other countries haven't recovered as quickly as the US has. "We need confirmation that the rest of the world's growth is going to catch up to the US."
"As far as investment opportunities for the rest of the world outside of the US," says Schweitzer, "if they catch up, there's some great opportunities."
