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Monthly Investment Outlook

Wells Fargo Investment Institute - October 20, 2021

Presenter: Scott Wren, Senior Global Market Strategist, Wells Fargo Investment Institute

Transcript: Our take on infrastructure and tax legislation

As we enter the last quarter of 2021, events in Washington are creating uncertainty for financial markets and investors. Questions surrounding market expectations under various infrastructure and tax scenarios are consuming much of the financial media’s airtime. This is likely to continue for at least the next handful of weeks. In addition, the debt ceiling is a hot topic and one that historically has created headwinds for the financial markets until the ceiling is raised.

Here is our take. In the end, we believe Congress will do three things:

  1. Pass tax increases on corporations and high-earning individuals.
  2. Pass twin bills allocating substantial funds to infrastructure projects — but we don’t know the exact dollar yet.
  3. Raise the debt ceiling.

It is likely that congressional leaders will use the reconciliation process to pass some version of the proposed legislation, although leaders may postpone decisions into December. The political uncertainties likely have not been priced into equity markets but are starting to show up in rising short-term yields. We expect earnings growth to remain positive but slow between now and year-end 2022, which will likely increase the chances for significant market volatility. It may become more uncomfortable to buy dips in equity markets. We strongly prefer a disciplined and incremental approach to putting cash to work — a dollar-cost-averaging approach — as equity markets continue higher but with more bumps.