The U.S. economy has lots of potential for continued growth, assisted by the economic stimulus package, according to Bill Fink of TD Bank.
At the same time, the tax increases that are being proposed could have a negative impact on mid- and small-sized companies and, therefore, on investors, said Paul Zemsky, chief investment officer of multi-asset strategies and solutions at Voya Financial.
The economic trends that are in play right now will have varying, and sometimes conflicting, impacts on business and investors, the two financial executives said in recent interviews.
Fink, executive vice president, chief lending officer and head of credit management at TD Bank's Commercial Banking Group, explained, “The strength of the stimulus is so profound that it will support the economy for the next six to 18 months” and give the U.S. economy time to recover. “For now, the stimulus will be the driver of the economy.”
Interest rates will remain low in the near future and won’t go above the historic lows until late 2022 or 2023, when the Federal Reserve Bank may ease its current policy, he added.
There may be an upward trend in inflation for a bit, but that will level off at the Fed’s target of around 2%, Fink said.
Business mergers and acquisitions also will be affected. M&As have kept up a steady growth in many industries, including for financial firms, but a corporate income tax increase may dampen that pace, according to Fink. There is some possibility that the corporate tax increase that is enacted will have special provisions for smaller business, which could be hurt more than larger firms by a uniform tax hike.
“But I don’t think a corporate tax increase will severely hurt the economy,” he said.
Not everyone agrees. According to the Tax Foundation, a think tank based in Washington, D.C., that studies tax policy, “Increasing the corporate income tax would undermine the progress policymakers made four years ago. An increase in the federal corporate tax rate to 28% would raise the U.S. federal-state combined tax rate to 32.34%, giving the U.S. the highest combined corporate income tax rate in the Organisation for Economic Co-operation and Development,” an economic organization of 37 countries.
Changing scenarios also are in play elsewhere. “Heightened expectations for inflation could cause buyers to want to move forward before later 2021 and early 2022. This would be driven by the fact that interest rates remain historically low, but there is a growing expectation that rates will rise slightly in 2022 as the Fed may need to increase them modestly to moderate possible inflation,” Fink said.
In addition, “the potential for inflation could lead to a weakening of the U.S. dollar, which would make U.S. exports less expensive and imports more expensive. This issue ultimately could make the attractiveness of companies that export or have increased potential for export more attractive for acquisition independent of the potential for an increased corporate income tax rate to 28%” from 21%, Fink said. Estimates are that the increase would bring in an additional $700 million a year.
Voya Financial’s Zemsky said he sees some potential for bad news, along with the increasing economic growth and overall good performance of the stock market. Long-term joblessness and weak labor force participation will remain major concerns and “are the main reason the Fed is holding its dovish posture,” he said.
There is no simple answer to how the proposed tax increases will affect the stock market and the economy. “It depends on what gets through Congress,” he said.
Capital gains tax increases and corporate income tax hikes “will make business activities less profitable for investors and for corporations,” Zemsky explained. But “I still expect to see record investment and business profits for the rest of the year. If equities become less profitable, we may see a shift to bonds” despite the low rates, he said. People may not invest in companies, and that, in the long term, could negatively affect economic growth.
“Right now, advisors should tell their clients not to overreact,” Zemsky said. “The proposals that are being discussed are trial balloons and might not come to pass.” Advisors should make sure “the current confusion does not scare clients away from the market.”