Midyear Outlook 2021

In the first half of 2021, the U.S. economy powered forward faster than nearly anyone had expected. The overall economic picture remains sound and will likely support strong profit growth and additional stock market gains, but also new risks to navigate. Here are some highlights from LPL Research Midyear Outlook 2021.

Overview: It’s been an unusual decline and recovery; a worldwide pandemic is a very unusual event.  There are a few reasons to be cautious, but we believe there are even more reasons to benefit from continued growth.

Economy: The US economy surprised nearly everyone to the upside as it continues to improve thanks to vaccinations, reopenings, and record stimulus.  Despite the challenges of ramping back up and increasing the number of people who are fully vaccinated, the recovery still seems capable of providing upside surprises.

Policy: President Biden has proposed increasing the corporate tax rate to 28%.  This would be up from the Trump era reduction to 21% (which was down from the Obama era of corporate tax rate of 35%).  We think with the upcoming negotiations, the top corporate rate may increase to 25%.  There have been 8 major corporate tax increases since 1940. The average stock market return (as measured by the S&P 500) for the 6 months after these tax increases has been +5.1%. There is also a proposed increase to the top tax rate for individuals on ordinary income tax rates from 37% to 39.6%.  Fun Fact: Only 0.32% of the population makes more than $1 million a year, so the truth is this won’t impact the other 99.68% of the population.

Stocks: We expect the strong economic recovery to continue to drive strong earnings growth and support further gains for stocks.  We also expect increased volatility.  As a reminder, this is a normal part of long-term investing.  It’s always a little disconcerting when it happens so feel free to call us if you have any concerns or just want to talk.

Bonds:  They still do their job of providing stability to a portfolio, but the income benefit from bonds is very low.  If inflation takes hold in earnest, expect rates to rise.  This will increase the income side of bond performance but lower the value of older bonds with low rates attached to them.

In 2020, a year in which planning anything seemed impossible, having a financial plan in place and sticking to it was more valuable than ever.  We build our plans when times are easier so that we can stick with them when times are hard, or just enjoy the benefits when times are good. As always, please feel free to call our office if you have any questions, or if you would like to schedule a meeting.

View the digital version: LPL Research Midyear Outlook 2021

Important Disclosures: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts may not develop as predicted. Please read the full Midyear Outlook 2021: Picking Up Speed publication for additional description and disclosure. This research material has been prepared by LPL Financial LLC.