Welcome to Thoughts on the market. I'm Michael Zizis, head of Public Policy Research and Municipal Strategy for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy

and financial markets.

It's Wednesday, January 20th at 11 a.m. in New York.

It's inauguration day, a Democratic administration takes the reins in the White House as well as control of Congress.

What should investors expect? Here's three key views and one wild card we're watching.

First, expect a lot more spending, which should boost growth in the near term, but dampen bond returns as rates move higher.

The primary source of the spending will be on another round of stimulus to help relieve the economic effects of COVID-19.

We expect this bill gets done this quarter, but after negotiation

will be shaved down to $1 trillion rather than the new administration's ask of $1.9 trillion.

Second, expect higher taxes, but not as much as advertised in not this calendar year.

The new administration supporting as much as 3 trillion dollars in new tax levies,

but when filtered down to what can get sufficient votes in Congress,

we think this number comes down to closer to

500 billion dollars, with a focus on moderate increases on companies and high earners.

And expect that the negotiation could take much of the year, pushing in the increase to next calendar year,

something Treasury Secretary nominee Yellen suggested at her confirmation hearing.

Altogether, that means new government spending is still likely to outpace new revenue,

keeping that aforementioned pressure on bond returns.

Third, expect the administration not to change direction on China.

The previous administration spent much of the last year creating new non-tariff barriers

with China such as export restrictions.

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