February 2022

In thinking about what may happen financially and economically over the next several years, we realize that much depends on how countries and their citizens react to medical issues. For perspective, Marcel Proust wrote in 1913: “For, medicine being a compendium of the successive and contradictory mistakes of doctors, even when we call in the best of them the chances are that we may be staking our hopes on some medical theory that will be proved false in a few years. So that to believe in medicine would be utter madness, were it not still a greater madness not to believe in it, for from this accumulation of errors a few valid theories have emerged in the long run.”

The S&P 500 Index returned 28.7% in 2021, following a 18.4% return in 2020, and a 31.5% return in 2019. Observers would be forgiven for not associating any of these returns with a two-year global pandemic. The index has in fact compounded at a 16.6% rate over the last 10 years. Equity investors have rarely had such excellent long-term returns. Last year, economic fundamentals were excellent too, with US GDP expanding 5.7% in real terms, surpassing its pre-pandemic size on a seasonally adjusted basis in the second quarter of 2021. S&P 500 Index earnings fell 13.9% in 2020 before rebounding an estimated 46% last year. The economic expansion and earnings rebound have been greatly helped by monetary and fiscal stimulus.

Sometimes changes to the US tax code seem like they are “floated” just to stir up money-making opportunities. Interest groups react to proposed changes by contacting, and throwing money at, lobbyists who counsel Congress against or for whatever was floated. There seems to be no recognition that managing the US tax code should be treated as a steering mechanism on a $20 trillion “truck.” Care should be taken when operating it, as if even a slight wrong move can send it careening.