Q&A with U.S. policy strategist Greg Valliere

Greg Valliere and Jeffrey Kleintop

A conversation between Greg Valliere, AGF's U.S. policy strategist, and Jeffrey Kleintop, Schwab's chief global investment strategist.

Key Points

  • Is another stimulus bill on the horizon?

  • How much does the deficit really matter?

  • What could we expect from tax policy under a Biden presidency?

  • What could a post-pandemic world look like for investors?


  • 1. Market indicators

    Jeffrey Kleintop: There's no need to recount what has made this year so unusual thus far. But it's also far from over. What's the most important thing you're watching right now that's influencing your outlook?

    Greg Valliere: Well, the first thing I've been focused on is whether or not we have the policy toolbox to get out of this pandemic and recession situation. Do we have the policy in Congress? Will we get more assistance?

    To that point, I think Congress acted with great speed and the Fed has been one of the great heroes. There was no playbook for this. I also think there'll be another stimulus bill later this summer to provide aid to state and local governments, maybe a tax credit to people going back to work, additional aid for hospitals, and possibly some liability insurance. I think it's going to be a big bill.

    There are some who feel that the deficit could become a huge problem later in the decade. But the people I've talked with still feel that this is a triage situation. And in a triage situation, saving the patient is the number one goal.

    "In a triage situation, saving the patient is the number one goal."

    Yes, in two or three years, we may need to tighten our belts. But for now, I think the policy toolbox is, thankfully, very full.

    2. Road to recovery

    Jeffrey Kleintop: History doesn't offer any perfect parallels to what we're going through right now. How can we think about the timing and shape of a recovery and its impacts?

    Greg Valliere: In this administration, there's a distinct desire to do whatever it takes. And I don't think the deficit matters.

    There's an economic theory that I'm sure you've heard of, the Modern Monetary Theory. It seems as if Donald Trump has embraced it, spending as if there is no tomorrow. They recently leaked talk of a $1 trillion infrastructure proposal. I think that will be the theme going forward. While this president will have to talk a bit about tax policy—and there will eventually be talk about dealing with the deficit—for now, the goal is to get the economy up and running.

    I think they have a few more months to do it. By Labor Day, the markets will really be paying attention to the upcoming election.

    3. Tax policy

    Jeffrey Kleintop: Speaking of the election, what happens if the Democrats control all three branches? What do you see as a tax policy under a potential Biden presidency?

    Greg Valliere: That's a really big deal. Because while people say that Joe Biden is a moderate—and he is a moderate, compared with Elizabeth Warren and Bernie Sanders—are his policies really so moderate?

    If he's elected, I expect Biden to go fairly quickly for a pretty big tax increase on both businesses and individuals. And I think he'll have a fairly aggressive regulatory agenda.

    But the key factor will be who controls the Senate. If one party controls all three branches, that's not a good story for the markets. If the Republicans keep their control of the Senate, that's a firewall against the activist legislation coming over from the House. So for the markets, it's really important to see a divided government.

    "For the markets, it's really important to see a divided government."

    4. Long-term pandemic implications

    Jeffrey Kleintop: Let's turn to some of the longer-term consequences of the pandemic, beyond November or the rest of this year. How does a post-pandemic world look different for investors?

    Greg Valliere: One of my favorite sayings is, "Demographics is destiny." And right now our demographics are pointing to some serious obligations that have to be met later in this decade. Highest among them are Social Security and Medicare. These are going to gobble up a lot of what little money we'll have left after spending this much on the pandemic.

    "Our demographics are pointing to some serious obligations that have to be met later in this decade."

    It looks as if total U.S. debt will be nearing $20 trillion in the next couple of years; this year our deficit will be around $4 trillion. These are staggering numbers. Maybe we'll all luck out, and interest rates will be at zero forever, and we'll be able to finance it. But I do think debt-servicing costs are going to be a major issue.

    I think the thorniest of all decisions is going to center on entitlements. Do the politicians dare to consider a little bit of a reduction in the cost-of-living adjustment? Do they dare to do anything on belt tightening? Right now, my answer is no.

    What You Can Do Next

    • See the mid-year market outlook for perspective from Liz Ann Sonders, Jeffrey Kleintop, and Kathy Jones on what advisors can expect for the rest of the year.
    • Read Mike Townsends latest RIA Washington Watch for commentary on the next COVID-19 aid bill, recent regulatory action and upcoming elections.
    • Tune into Mike Townsend's podcast, Washingtonwise Investor, for insights on the politics and policies that can impact portfolios.
    • Consider a custodian that invests in your success. If you're thinking about becoming an independent investment advisor, contact us to learn more about the benefits of a Schwab custodial relationship.