a new administration: Politics and prosperity - or not?
At the outset of a new Administration, investors often focus upon the potential macroeconomic and financial market outcomes which may result during its term in office. Some of the factors shaping these outcomes include initiatives in areas such as fiscal and tax policy, regulatory oversight and the response to such changes by the equity and bond markets. Of course, a new Administration does not operate in a policy vacuum, but needs support from both the legislative and judicial branches of government to achieve its goals.
Before exploring some of the potential initiatives which may arise in the new Administration, let’s look first at the historical record of what occurred during prior ones. More specifically, since the macroeconomy often—but not always—drives financial markets, let’s review annual changes in “real GDP” growth, i.e. adjusted for inflation, for the 12 most recent Administrations starting with Eisenhower’s term in January, 1953.
Overall, the average GDP growth rate during these 68 years has been 3.0% per annum. The highest annual rate of GDP growth was 5.3% during Kennedy’s term, which followed the 1960-61 recession. Kennedy’s legislative initiatives included a significant stimulus to boost consumer spending, and a lowering of personal income tax rates to 70% from the post-World War 2 high of 91%.
The lowest annual GDP growth rate was 1.1% during the Trump administration, affected overwhelmingly by the global economic collapse arising from the Covid-19 Pandemic. More specifically, the fall in Q2 2020 GDP alone was negative 32.8%, or a drop of $2.0 trillion from the prior Quarter.
While the macroeconomy doesn’t predict market returns, it often provides a tail wind to support future market performance. The table below displays the real, i.e. inflation-adjusted, annual returns of the S&P 500 Index for each of the 16 Administrations which began with Calvin Coolidge in 1923. Note that the highest annual return of 28.9% occurred during the Roaring ‘20s during the Coolidge Administration. This Administration was followed by Herbert Hoover’s, which started 1929 with the Great Depression. The S&P 500 then lost 17.5% of its market value in each of the next four years—the lowest annual return for any Administration. 
To illustrate the potential disconnect which may result between the performance of the macroeconomy and the financial markets, note that the Trump Administration, with its Covid-affected GDP return of only 1.1% per annum, actually achieved the third-highest annual S&P 500 return of 14.8%.
Turning to the new Administration, let’s examine just three policy initiatives which it has already begun or is intending to launch to shape future macroeconomic outcomes. These initiatives include significant fiscal stimulus for both individuals and corporations, a potential change in existing income tax rates and increased regulatory oversight.
Let’s begin with an overview of the most recent fiscal stimulus bill, “The American Rescue Plan Act”, which passed in March, 2021 and totaled $1.9 trillion. This Act followed the $900 billion “Consolidated Appropriation Act” of December, 2020, and the $2.2 trillion “CARES Act” of March, 2020.
The CARES Act was the largest fiscal stimulus in US history, equaling 10% of US GDP for 2020. It was 65% larger than the fiscal stimulus passed by Congress at the outset of the Great Recession in 2009. Overall, the $5.0 trillion total of these three stimulus bills, all enacted within the last 12 months, actually exceeds the $4.9 trillion annual GDP of Japan. So, if these stimulus sums were transformed into the GDP of a stand-alone country, this would make it the third-largest country in the world—only the GDP of the US and China would exceed it.
Goldman Sachs forecasts that annual US GDP growth in 2021 will rise 7.7%, rebounding from 2020’s dismal GDP number of negative 3.5% as a result of the two most recent stimulus bills. However, this stimulus-induced rise in macroeconomic activity may have some less attractive outcomes, including a potential rise in interest rates. For example, the 10-year US Treasury note, which yielded 0.917% at the beginning of 2021, reached a 14-month high of 1.726% in March. As consumer, business and mortgage loan rates move higher when such interest rate changes occur, the increased cost of credit may dampen future spending and investment levels. The rise in yields also suggests to some market observers that the current rate of inflation may increase from its historically subdued levels.
The magnitude of these stimulus bills is also creating rising Federal budget deficits, which are now projected to reach $2.3 trillion in 2021, or 10.3% of US GDP. To begin to reduce, or at least halt, this continuing growth in Federal deficits, the new Administration is stating that existing tax rates, both for individuals and corporations, face increased scrutiny going forward.
While tax legislation will be shaped by a myriad of forces inside and outside of the Administration, the graphic below suggests one area of its potential focus. More specifically, the amount of US corporate income taxes collected have grown at an annual rate of 4% since 1970. At that time, corporate taxes were 23% of total Federal taxes collected. They are now only 9% of total taxes collected, a drop of 14 percentage points. Thus, the Administration is now reviewing 2018 legislation which permanently reduced the top rate for corporate taxes from 35% to 21%, and which repealed the Corporate Alternative Minimum Tax.
Several technology sector corporations reveal the outcome of complex tax strategies which may have helped to minimize their corporate tax payments. More specifically, Amazon realized a $10.8 billion profit in 2018, but claimed a Federal tax rebate of $129 million. Netflix generated a $856 million profit during the same period, but claimed a $22 million tax rebate. Overall, 60 profitable Fortune 500 companies earned $79 billion in 2018 profits without paying any Federal taxes, receiving $4.3 billion in tax rebates instead.
In contrast, personal income taxes collected grew at an annual rate of 6% during the same period. And, since 1970, personal taxes have increased their share of total taxes collected from 77% to 91%, or an increase of 14 percentage points to offset the fall in corporate tax collections. The current maximum tax rate for individuals was reduced temporarily from 39.6% to 37% in 2018, but the new Administration suggests that it now wants to enact a 39.6% rate for higher-earning individuals.
Another potential initiative of the new Administration is increased regulatory scrutiny of corporations, especially in the technology sector. To offer one example of the Administration’s focus, there has been a significant shift in advertising spending away from broadcast television and traditional print media toward digital media. In 2015, newspapers and magazines accounted for 18% of total US advertising spending, or $36 billion. By 2020, their share had fallen to just 8% of the total, and their advertising revenues had dropped to $17.5 billion, a decline of 51% in just five years.
Digital media now accounts for 59% of the $258 billion spent in 2020 for traditional and digital advertising dollars. However, as shown in the graphic below, just three technology companies—Amazon, Facebook and Google—are projected to control 69% of total dollars spent in digital advertising. In other words, these three companies received 41% of all advertising dollars spent in 2020, irrespective of the choice of media, and their share continues its rise. This increasing level of revenue concentration has caused heightened concern among advertisers, consumer privacy advocates, traditional media outlets and Administration regulators.
One result of this growing concern has been recent investigations of these three firms by the Justice Department, the Federal Trade Commission, several Congressional committees and numerous state Attorneys General. Their initiatives go beyond anti-trust concerns, and have expanded to include issues such as consumer data privacy, political bias, misinformation and the lack of liability by these leading internet platforms. The recent Justice Department lawsuit seeking to break up Facebook may portend the magnitude of future regulatory actions by the new Administration.
Of course, investors lack a crystal ball to foretell the new Administration’s actions and potential market responses. However, significant fiscal, tax and regulatory policy initiatives could have a material impact upon our macroeconomy, as has been shown historically. The direction of such impact, upward or downward, is currently—and may remain—unclear for months or even years.
Despite such uncertainty, The Mather Group remains dedicated to helping you achieve your retirement and life goals. Your financial plan is key to sustaining the focus necessary to identify, measure and pursue these goals. When life events occur, we welcome the opportunity to update or refine your financial plan to reflect these new opportunities. If you have further questions or ideas, please do not hesitate to reach out to a member of The Mather Group’s professional team.
Sources: Bloomberg; Congressional Budget Office; Congressional Record Index; eMarketer.com; Federal Reserve Bank of St. Louis; FORTUNE Magazine; Goldman Sachs; Institute on Taxation and Economic Policy; International Monetary Fund; Statista; U.S. Bureau of Economic Analysis; Wall Street Journal
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The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices
