Monica Guerra: Hello and welcome to Wealth Management Insights. I’m Monica Guerra, US Policy Strategist for Morgan Stanley Wealth Management, and I’m recording this on Wednesday, February 1.
Last year’s challenges in the economy and markets probably led many investors to eagerly welcome 2023. But, as we set course for the new year, it is important to remember that many of the factors that shaped our past also inform our future. We need to apply this thinking as we consider the role of public policy in setting market expectations and identifying opportunities and risks.
With that, I’d like to talk about 10 of the top public policy and regulatory actions that we’re watching closely this year.
- First, monetary policy. There are reasons to think that inflation has peaked, but its path forward is far from decided. If inflation remains sticky, the Federal Reserve is likely to keep rates higher for longer, while weaker economic conditions could lead the Fed to cut rates.
- Second, when it comes to the federal debt limit, contentious policy debates in Washington could pressure market performance and cause heightened volatility. And while markets could become choppy, we expect legislators to find a resolution to debt ceiling concerns and for the nation to avoid default.
- Next, corporate tax increases are scheduled for the 2023 tax year. The expiration of some provisions in the 2017 Tax Cuts and Jobs Act, along with new business taxes introduced in the 2022 Inflation Reduction Act, could cost businesses over $800 billion during the next decade.
- Fourth, national security and supply chain concerns are likely to continue to support deglobalization. Alongside the trend, electric vehicle, semiconductor and solar companies could be positioned to benefit from congressional support and fiscal incentives geared toward reshoring supply chains.
- Number 5, the 2023 National Defense Authorization Act included a 10% increase in the national defense budget. Significant defense spending growth is likely to support market performance for aerospace and defense.
- Furthermore, energy market volatility has opened the door for dual-mandate energy policy to emerge in Washington. We expect the Biden administration to strategically support both fossil-fuel and clean-energy policies, as energy markets remain volatile amid geopolitical pressures.
- Number 7, cybersecurity threats have created tailwinds for the industry, with President Biden’s 2023 budget proposal including $1 billion for cybersecurity improvements.
- Eighth, cryptocurrencies are likely to remain a regulatory focus, with the SEC and Congress seeking to set legal parameters for the industry.
- Additionally, Big Tech faces pressures that may include industry-level compliance barriers. Still, we think regulatory risks will be manageable for the sector, as economic and market trends will likely have a greater impact on the sector’s performance.
- And lastly, changes to Medicaid could cause between 5.3 million and 14.2 million people to lose coverage, placing pressure on the largest managed care organizations. However, this may provide a catalyst for some individuals to opt for private insurance coverage through state-managed health insurance exchanges.
This was just a brief overview of the 10 policy actions we’re watching. We go into greater detail on all of these points in a recently published US Policy Pulse report, titled “10 Policy Actions to Watch in 2023.” If you’d like a copy, or if you have any questions about related portfolio strategies, please reach out to your Morgan Stanley Financial Advisor. Thank you all for listening.
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