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How Elections Affect the Markets

How Elections Affect the Markets

Preparing ourselves for the next few months

Elections are civil, but not necessarily a “clean fight”

Negative campaign advertising and rhetoric is a tradition in our presidential elections, dating back to the early 1800s. You may think today’s “mud-slinging” between Trump and Biden is bad…even they might blush at some of the remarks made by the supporters of many of our founding fathers including John Adams, Thomas Jefferson, John Quincy Adams, Andrew Jackson and others – calling each other a drunk, an adulterer, a pimp, tolerating murder and robbery, enabling rape and incest, allowing gambling and prostitution, and more.

While the language may have toned down a bit over the years, our access and exposure to it has gone through the roof thanks to the 24/365 news cycle and social media. Such blanket, continuous coverage creates a very tense and polarizing political climate that seems to permeate throughout our everyday lives. We all know we should just tune out the noise and turn off the “talking heads”, but we’re often sucked in by the drama of it all…

Markets “bleed green”, not red or blue

Regardless of your feelings and opinions about either candidate, it is our duty to you to reel you back in and refocus your attention to the short and long-term consequences of political and/or legislative change on your lifetime goals of achieving financial independence.

The reality we must all remind ourselves of is that the markets are often agnostic to political party control; irrespective of who won the presidency or which party held the majority in Congress, historically the markets have mostly gone up. Why? Because no matter what’s going on in Capitol Hill, people still go out and buy stuff (yes, it’s really that simple). The markets care about future corporate earnings, and as long as companies still provide goods and services people want…that’s what matters.

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Certainly new legislation and policy changes can and often do have a substantial impact to varying segments of the economy, but adjustments typically come on a macro scale in relatively short order to level things out. We’ll take a look at pieces of the agenda for both Trump and Biden and discuss their implications below. Just remember…no matter how visceral or raw your emotional reaction is to these policies, we are not facing Armageddon. Apple will keep making iPhones that people will buy, Jimmy John’s will keep making sandwiches that people will eat, Boeing will keep making airplanes that people will fly on, and we’ll all go on living our lives. 

Tax Cuts versus Tax Hikes

Let’s start off with the topic that delineates most party lines…taxes.

To date, Trump has not yet outlined specific proposals outside of remaining steadfast in his commitment to keep the existing tax cuts from the Tax Cuts and Jobs Act (TCJA) in place or even extending them past their sunset date scheduled for 2025. If Trump wins, we would expect current tax policy to remain largely the same through his term, regardless of which party controls Congress.

On the other side, it’s no secret that Biden has plenty of tax proposals, most of which involve an increase in taxation for high income earners and corporations. If Biden wins the presidency, but the GOP retains majority control over Congress, we believe it is unlikely any of these proposals will be implemented. However, if the Democrats sweep the election, we think the Biden administration could be successful in pushing through their more modest proposals which include raising the top income tax rate from 37% back to 39.6% where it was before the TCJA, as well as increasing the corporate tax rate from 21% up to 28%, but still below the 35% pre-TCJA rate. As for the other, more aggressive tax proposals, we believe it will be difficult for Biden to get these through Congress in their current form, even with a Democratic majority. And if the COVID-19 pandemic drags on, it will be harder still to implement these tax hikes. 

Unless the Democrats sweep the election, we think it's unlikely new tax policy will be implemented. Even if this is the case, in our opinion Biden's more aggressive tax proposals will be hard to push through Congress. 

Most Americans would likely experience a minimal change to their tax situation if Biden wins, even with a Democratic sweep. But high income earners could experience a tax hit – particularly if they own a business or other capital assets – which could significantly impact their long-term tax and estate planning strategies. If any of these policy changes come to fruition, we will address relevant considerations for your personal circumstances in our ongoing Dashboard conversations.

For corporations, if a tax increase is put into effect, we would expect to see a modest, one-time downward adjustment similar to the one-time upward movement we saw with the tax cuts.

Keep in mind, there’s a difference between what a tax hike means to individuals or even businesses and what it means to the markets. As we saw in the chart above, the markets tend to go up over time, regardless of tax rates or political tensions. There may be short-term volatility or movement as the markets adjust to new policies, but history shows their resiliency in the long run. 

Healthcare

If Trump wins, we would expect a continuation of the status-quo with regards to Healthcare legislation. Should the GOP sweep, which is highly unlikely, they may attempt to repeal the Affordable Care Act (ACA/ “Obamacare”) again.

If Biden wins, he will likely push for Healthcare policy change. The form it takes and the likelihood of getting it passed will all depend on negotiations within Congress. Certainly with a Democratic sweep, we would expect the GOP to have less bargaining power to leverage; however, given there would likely be a narrow Democratic majority, the Biden administration could still have trouble pushing a bill through.

Infrastructure & Climate Change

Trump is preparing an infrastructure proposal as part of his push to spur the American economy post-pandemic. He has called for such investments since his 2016 campaign to rebuild roads and bridges and improve and expand access to broadband and 5G networks.

Biden has tied many of his infrastructure proposals to further his climate change agenda. He supports the Green New Deal as a framework, calling for decreased emissions in various forms and a “Clean Energy Revolution”. Biden plans to invest in rebuilding various public services to mitigate climate change.

The Bottom Line

We expect this upcoming election will be full of twists and turns, with political leaders from both sides of the aisle shouting at each other and fighting for the megaphone. We anticipate additional market volatility as we approach the election, and have taken steps within portfolios to prepare for this. But no matter how crazy things get, always remember we will persevere.

Onwards and upwards!

 

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.