Biden’s Build Back Better (BBB) plan and his first 100 days
The remaining details of US President Joe Biden’s Build Back Better agenda will be revealed today, April 28. The third and final part, the American Families Plan, will include various social welfare, health care and educational reforms as well as tax credits, probably costing about USD 1.5 trillion in all. Proposals for funding the BBB plan − expected to include a doubling of capital gains tax from today’s 20% rate for the highest income-earners − will probably also be announced today. Word of the coming capital gains tax proposal is what pushed down US share prices last Thursday, April 22. On April 26 the White House defended the planned capital gains tax hike, saying that it would only affect 0.3% of all US taxpayers.
On Friday, April 30, Biden will mark his first 100 days in office, which the media can be expected to summarise and analyse extensively.
COVID-19: Widespread gloom, with few bright spots
The pandemic and the health care situation are very concerning, with soaring infection rates in many parts of the world – especially India and Brazil. In India the coronavirus has led to a humanitarian catastrophe. Many other countries, including the US and China, are now mobilising large-scale support for India.
One positive note about the pandemic comes from the Biden administration, which has just published statistics showing that 200 million vaccine doses had been provided to the US population by the president’s first 92 days in office. Last weekend The New York Times also reported that fully vaccinated Americans may be allowed to visit European Union countries this summer.
The report season will continue, with many more earnings announcements
We have seen a strong start to the quarterly report season, confirming a continued robust economic recovery. Meanwhile there are also clear signals about component shortages, cost increases and price hikes. During the report season, persuasive upside surprises are needed before a company’s stock price will climb, whereas earnings in line with expectations often lead to profit-taking.
US equity indices such as the S&P 500 and Nasdaq Composite are continuing their cautious upward trend to new record levels. After about one third of S&P 500 companies had published their reports, 84% had surpassed expectations.
What investments are actually green?
On April 21, the European Commission published the first part of its Taxonomy, a new set of regulations that will be aimed at channelling public and private finance into sustainable investments. There were discussions and debates up to the last minute, and so far the Taxonomy does not address natural gas and nuclear energy.
Central banks, including the Fed, issue statements after policy meetings
Today’s statement from the US Federal Reserve, following its April 27-28 policy meeting, will probably not offer any major surprises. Instead the focus of attention will be on the timing of the Fed’s “tapering” of its stimulative bond purchases. Sweden’s Riksbank issued its latest post-meeting statement yesterday, April 27, which included leaving the repo rate unchanged at 0% as expected.
Reflections: Welcome to the “subscription economy”
The subscription economy is growing like gangbusters. More and more of the goods and services that we buy can now be subscribed to. For companies, subscriptions are an effective sales model that reduces their costs and increases predictability. For us consumers, they are convenient. The risk with subscriptions is that they make us passive and less inclined to continuously compare prices. In the long run, this may lead to a weakening of the internet’s price-lowering function.
To see the full article by SEB’s Chief Strategist Johan Javeus, click here.
Last but not least, on Tuesday, May 4, SEB will publish its flagship Nordic Outlook research report. Don’t miss it!
Our market view
Recovery will support stock markets
Corporate earnings report for the first quarter of 2021 are now pouring in. So far the trend of the past few quarters is continuing, with upside surprises predominating in the reports. The rather lukewarm market reaction probably reflects sizeable increases in share prices ahead of the reports. We remain relatively upbeat about stock markets, as explained below.
Strong investor faith in a coming economic recovery is providing continued support to stock markets. Another contributing factor is that the upturn in US Treasury yields has levelled off somewhat in recent weeks. Most observers, including us, expect further small upturns in yields during 2021 and believe that sharp earnings increases among listed companies will provide sufficient support to share prices.
Excessively rapid and/or large yield increases may of course disturb this scenario. Likewise if production disruptions − such as the semiconductor and other component shortages reported by many companies − have an impact on corporate earnings. The quarterly report season that is now under way will be important to future share prices. Despite these risks and recent price upturns, we are sticking to our cautiously optimistic view of stock markets.
In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022.
In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.
Share valuations today are undoubtedly high from a historical perspective, but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.
Continued potential, though a lot has been priced in
Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This suggests that the growth picture will have to become much worse, causing downward adjustments in companies' earnings forecasts, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. Recent market upturns naturally increase the risk of profit-taking, with downturns of 10% or perhaps 15%, yet we expect stock market indices to be a little higher this coming autumn than today.