How Presidential Cycles Impact the Markets
As we get nearer to the November Presidential election, concerns have been rising regarding who is elected and the impact their respective party will have on the markets and economy. Though 2020 has been more unpredictable than most years, consistent with previous election years, however, is the shared view from both political parties that if the other side wins then consequences will be dire. Also consistent with year’s past is how ‘this election’ is the most important in history.
Though the future holds no promises, it can be helpful to use history as a guide to form expectations. The following chart compares the performance of four indices that track large US companies, small US companies, domestic intermediate-term bonds, and large international companies from 1980 to present during each party’s presidential tenure.
While US stocks have historically performed better with a Democratic president, bonds have fared better under a Republican president. Consequently, investors who had a diversified and balanced portfolio fared roughly the same regardless of which party held the White House.
While this is just one of many ways to dissect performance under certain parties, these limited points of data do confirm one constant — markets are unpredictable but with enough time they have always trended upward.
Our focus for our clients is first and foremost to ensure that the level of risk we are taking with your investments is within your comfort zone while simultaneously allowing you to achieve your goals. By having a diverse allocation to multiple different asset classes and strategies you will be in the best position to achieve your long-term goals no matter which party takes office.
What about proposed tax law changes?
One of the areas we are watching closely is the proposed tax law changes each candidate is suggesting. Much of Trump’s proposal extends the Tax Cut and Jobs Act (TCJA) which reduced taxes for many individuals and corporations but is set to expire in 2025. As with any election, the challenger to the incumbent often has extremely differing opinions on policy, and Biden’s proposal is no different. The Biden proposal most significantly impacts corporations by increasing their tax rate to 28% from 21%, a mark that sits in the middle from the previous tax cycle which taxed corporations at 35%.
As for individuals, those in the highest tax bracket would be the most affected by Biden’s proposal. Single filers making more than $518k, or joint filers making more than $622k, the maximum tax bracket would see a return to the previous tax rate of 39.6% from the current 37%. Additionally, the current law imposes a 6.2% Social Security tax on the first $137k of income. In Biden’s proposal, the tax would resume on all earnings above $400k. For those with annual incomes greater than $1mm, the capital gains rate is proposed to increase from 20% to 39.6%.
The area with the least clarity but would likely have the greatest impact on the largest number of people is the proposed reduction in the estate exemption. Under the TCJA, $11.8mm can be excluded per person from estate taxation, a drastic increase from the previous exclusion of $5.5mm in 2017. Also set to expire in 2025, Trump has proposed making the change permanent whereas Biden has said the exclusion would return to “historic norms.” Although there has not been much clarity about what “historic norms” specifically means, the consensus speculation is either $3.5mm (from 2009) or $5.5mm (from 2017) per person.
The other major proposal to estate taxation from Biden’s camp is eliminating the step-up in basis to heirs. This would mean that inheritors may have to pay capital gains taxes when selling an inherited asset. To preserve wealth for our clients and their heirs, we will be looking at multiple strategies to ensure your current estate plan is not impacted negatively should either of these changes occur.
While we continue to monitor your portfolio, look for investments that provide added value at your level of risk, and work to ensure that your plan is always in the best possible position when regulations change, we understand that elections of this magnitude can cause some emotional uncertainty. Though some of these proposed changes are significant, it is important to remember that not all policies and proposals make it to become law due to the checks and balances from the other party.
In any case, we are here to support you and your family throughout your financial journey, so please reach out to us with any concerns or questions.