Pure’s Executive Vice President & Chief Investment Officer, Brian Perry, CFP®, CFA® charter, AIF®, provides insight into the upcoming 2024 presidential election and its impact on the financial markets.
Outline
- 00:00 Intro
- 0:28 States likely to decide the election
- 1:40 Congress impact
- 3:15 The race is a toss up
- 3:55 Medicare and Social Security
- 4:21 Possible tax outcomes
- 7:28 Trump 2.0 economic picture
- 7:57 Harris economic picture
- 8:15 Consumer confidence by political affiliation
- 10:20: Question and Answer
- How about the Harris proposed capital tax gain?
- What about taxes on unrealized capital gains?
- What impact does the deficit have on the market?
- What happening with the More Homes on the Market Act?
- Will you be addressing predictions in real estate?
- Both candidates would balloon the national debt, is that true?
18:56 US dollar share of global markets - 22:13 Higher taxes are the only to balance budget
- 24:52 Markets have down well under most political mixes
- 28:20 Staying invested worked
- 29:00 Question and Answer
- What impact will BRICS have on the future economy and the markets?
- What do you think of the rate of inflation in the next six months?
- I understand that the president can raise tariffs without Congress approval, what is the impact on the economy on prices?
- Is the market over bought? Do you have any opinions of short-term direction?
- 35:50 Inflation is moderating
- 41:56 Asset class performance
- 47:30 Question and Answer
- What about the price of gold?
- What about mortgage rates?
- What is considered as “other investments” other than the stock markets in asset classes?
Transcript
Andi: Hello and welcome to this Outlook and Impact of the 2024 Market Election. I would like to present to you, Brian Perry, CFP®, CFA.
Brian: You know, as with any election, every vote matters, please get out and vote. Right. We’re all fortunate to be able to do that. But when it comes to the President, the reality is, is that there’s a handful of states or a half dozen states that matter more than most. And the reason being is that they are a little bit more open than some other states, right? So a lot of the coastal states, for instance, tend to lean heavily Democratic, and you kind of know that Kamala Harris will cover those. There are other states that are more red states, and then there are the purple states, where things are a little bit more unknown. And the swing states, particularly Georgia, Nevada, Wisconsin, Michigan, Arizona, Pennsylvania. There you see a total of, what, about 85 or so electoral votes, and these are the half dozen states that will likely decide the election. You can see that in many cases, Trump won them in 2016 and was elected President. Many of these states, Biden then won in 2020 and obviously was elected president. And then you can see the current polling below there, where there’s some, some swing between Trump and Harris. Keep in mind, again, this is from back in August, so some of these could have changed a little bit. And also that these are all within the margin of error. So these are all a toss-up. And as CNN and all those outlets start rolling in with election updates on election night, we’ll begin to know who’s going to win these states and who will be the next President of the United States. And you know one of the things is in addition to the presidency we also have Congress right and the congressional election. And although so much attention is focused on the President right and we had obviously a crazy Summer guys. I mean who would have thought- let’s just step back, before we even talk about Congress, let’s just talk about how impactful politics actually is on the markets and markets have had a pretty good year. When you think about what’s happened since the Summer where we had a presidential candidate who’s a former President, an assassination attempt, actually maybe a couple of them. We had a sitting President who was supposed to run for office, drop out of the election, and then a new candidate come in at the 11th hour, a lot of turmoil from a political standpoint, and markets for the most part really didn’t care. Markets kind of marched up, they moved around, mostly based on what the economy was doing and what the Federal Reserve was doing. What corporate earnings were doing, which in the long run are what really matter for markets. And so while we’re talking politics here, I think that qualifier is really important is that ultimately, it’s the economy and corporate profits that make a difference when it comes to investing. When we talk about the election, in addition to the Presidential, there’s also Congress. And right now it looks like a toss-up, where the Senate is leaning towards Republican, the House may be on the fence, possibly leaning towards Democratic, and this will be equally important to the Presidential election.
We’ll see what happens. You can see just the math there in the highlighted blue as far as vulnerable seats, where there’s more at stake for Republicans as far as seats that are in contention. But then when it comes to the Senate, there’s 8 seats that are open, that are viewed as vulnerable Democrat seats and only one Republican, hence the odds of the Republicans flipping the Senate. You know, at this point, the race is a toss-up where I think it’s fair to call it 50/50, Trump and Harris. And then you look down at the odds of a split Congress versus a sweep, Democrat or Republican. And what you really get is that, you know, if you run these probabilities, a 15% chance of a Republican sweep, call it a 10% chance of a Democrat sweep, and then a 75% chance of some sort of mixed or divided government. Sounds, you know, sometimes it’s like, hey, Congress can’t get along, the government can’t get along, in a lot of ways that’s- it’s how the Constitution was created was to keep one party from getting too much power. So that change comes slowly. And I know sometimes it’s frustrating, but from a market perspective, split Congress, split government has not been historically a bad thing. What might this all mean? Well, for one thing, you can see here are some slides on spending and we’ll come back to this just as far as what the government is spending and where it’s spending it. But before we do, let’s move forward and talk taxes. Because ultimately, we get a lot of focus on what’s going on with the deficit, where is the government spending money, what are taxes going to do? And really, it’s that last bit, the taxes that are the outcome of government spending. Possible tax outcomes. And keep in mind, this is speculation. It’s well-thought-out speculation, but there’s no guarantee that this is what’s actually going to happen. But what you can see here, and there’s a lot of numbers, obviously the goal is not to memorize everything on here, but we have top tax rates, individual tax brackets, SALT or state and local taxes, estate tax exemption, child tax credit, standard deduction, etc., from pre-2017. So in 2017, when Trump was President, he passed the Tax Cut and Jobs Act, which was one of the larger overhauls of tax policy in quite a number of years and lowered individual tax rates to some of the lowest that we’ve had really in our lifetimes. There was a heartbeat back in the first Bush administration where taxes were lower, but for the most part, taxes are lower right now at the income level than they have been for most of our lifetimes. So you can see the tax rates post and pre the Tax Cuts and Jobs Act, and then some speculation around what might happen if Republicans control Congress. There’s a split Congress or a Democratic Congress, depending on whether Trump or Harris is elected. A couple things to, to point out here is that although the Presidents obviously have proposals around what they think taxes will do, ultimately it is Congress that creates tax law. It’s also important to keep in mind that the way that the tax law is currently written, tax rates will go higher after 2025. So unless Congress acts, if nothing happens tax rates will increase starting in 2026. The speculation is that if you look at individual tax brackets in the second row, the speculation is that tax cuts will be extended under Trump and will likely be mostly extended under Harris, although not potentially for higher-earning people. Then you look at state and local taxes. And for those of you on the East coast, maybe in New York, New Jersey, and certainly for those of you in California, this is a topic that’s near and dear to your heart. SALT, state and local taxes, used to be able to write off the full amount. And then post-2017, that was capped at $10,000. And so there are proposals under both candidates to raise that limit. So potentially, if this goes through a little bit of relief on those high property taxes, those high state and local taxes, for those of you in high-cost centers. And then you can see some of the other variables as well around corporate taxes. There’s some talk from Kamala Harris about potentially raising capital gains rate as well. So, a lot of changes, I think, the bottom line. And this is one of the reasons that although today’s focus is on the election and then the impact on the economy and financial markets, why taxes really matter.
And one of the things that we focus on quite a bit at Pure Financial is tax planning because a) it’s a playbook, where the law is known. There’s a lot of wiggle room within there. The reality is, is that the first two pages or 3 pages of the tax code are tax rates and then how to file and calculate taxes, but the tax code 79,000 pages. So those other 78,997 pages are how to avoid the taxes laid out in the first 3 pages. That’s something that we focus on quite a bit is not tax avoidance. But or excuse me, not tax evasion, but rather how to minimize the amount of tax you owe within the framework of the rules. Not going to cover everything here, other than to say that if Trump is elected, I think the expectation is that the economic impacts will be a little more nuanced. Will there be some big winners and some big losers, depending on sector, industry, etc. And if we switch to the next slide under a Harris presidency, the idea is that it’s viewed as perhaps a little more of a continuation of Biden policies, and maybe, not quite as large of changes or swings, Alright, here’s the Harris 1.0 where it’s seen, you see, the Trump slide had a lot more green and red as well as some yellow. And here there’s a whole lot of yellow with the expectation that policies in many regards will be a continuation of Biden, although there’s certainly no guarantee of that, that’s the expectation, but who knows. Here, this is one of the key slides, and this is lots of wiggly lines, gray, blue, and red. Red being Republican, Democrat being blue, and then the total is the gray. And what I think is important here is just the huge swings and the differences where, when quote/unquote their person or their party is in power, people tend to feel a lot better about the economy. And so you can see that during the Bush administration to the left side of this, Republicans felt way more confident about the economy than Democrats. And then during the Obama years, Democrats felt more powerful or better about the economy than Republicans and then vice versa under Trump. And then again with Biden. And the reality is if you’re a Republican and your neighbor’s a Democrat, and you both work at the same company, you guys have very similar lifestyles and you’re living in the same economy. You’re shopping at the same stores. You have the same neighbors and yet depending on whether or not you’re supportive of the power or the party in power, you may feel completely differently about how the economy is doing.
The truth is usually in the middle, right? That’s why the gray line runs through the middle is that it tends to be a little bit more nuanced. So generally speaking, things aren’t quite as bad as some people feel. Things aren’t quite as good as some people feel. And it’s important, like we said, you know, obviously our right as Americans is to vote. Politics matters quite a bit, especially from a societal perspective. But again, getting back to financial markets and the economy, the impact of politics is somewhat more muted than many people think. And again, I think we saw evidence of that this past Summer, as we saw quite a bit of turmoil from a political landscape, and yet markets were largely unfazed by it. So let’s go on to the next section here. And this is really where we get down to the nuts and bolts of it, of does it really matter? So all this stuff that we’re talking about, about who’s going to win the Presidency, who’s going to control Congress, does it really make a difference? And again, obviously, we’re from the direction of the country and whatnot, it does make a difference. But from an economic and investment perspective, as investors, as people that are trying to navigate your finances to meet your financial goals, to get to or through retirement or take care of your families, does this stuff matter? And before I move on, let me see if Kathryn has any questions.
Kathryn: “How about the Harris proposed capital tax gain?”
Brian: So there is a proposal under Kamala Harris to raise the capital gains rate. So right now at the federal level, there are personal income tax rates that range from 10% to 37%. And then there are capital gains rates, which lay over the individual income tax rates. Those range from zero at the lower income levels to 15% for most people, and then to 20% for those higher earners. And then in some instances, there’s also a 3.8% surcharge to pay for the Affordable Care Act. Trump has said that he would maintain those rates. Kamala Harris has proposed actually raising them a little bit. So to go to 28% for that top capital gains rate rather than 20%. And to make a 5% Affordable Care Act surcharge rather than 3.8%. So theoretically today, the top tax rate for capital gains is 23.8%. If Harris’s proposal was to come to pass, that rate would increase to 33%, so about a 10% increase. We’ll see though, right? Again, as, as I said, Congress makes tax law, the President can propose, but ultimately, it’s up to Congress what actually happens. Also, I would point out that Kamala Harris’s proposal on capital gains to increase that rate is somewhat less than what Joe Biden had proposed back in the day where his, his proposal was to make it the same as ordinary income tax rates, which is the way that it’s taxed in some states. So for instance, in California, there is no capital gains tax rate. Capital gains are taxed at the same level as ordinary income. So TBD. But certainly, if you have large capital gains or capital gains you’re considering taking, you know what the rate is this year. You have a calendar deadline of December 31st. It may be the time to consider whether or not capital gains, either taking them or tax loss harvesting or whatever it is from a tax management perspective, the clock is ticking on really the only year you know what tax rates are going to be in your lifetime. And while they’re at historical lows, take action, right? Talk to your financial advisor, either here at Pure, if you’re a client, if you’re not a client, talk to your existing financial advisor or we offer free financial assessments. Come in, talk to us. Don’t want to cost you anything. We’ll go through some of those things to help you figure it out because this could be an opportunity from a capital gains perspective.
Andi: Barbara says, “What about unrealized capital gains?”
Brian: Yeah, so there’s been proposals. What Barbara is referring to is that there’s been proposals to tax unrealized capital gains. A couple things. One is, when those things have been proposed- So, in other words, usually capital gains are taxed when you sell. So, you bought a stock for $100,000, it grew to $1,000,000, you sell it, you pay taxes on those gains. The proposal is that, hey, it went from $100,000 to $1,000,000, even though you don’t sell it, you owe tax on that unrealized gain. Usually when that’s been proposed or floated, it’s for people at very, very high income levels. So it’s sometimes referred to as a billionaire tax where, I’ve seen anywhere from people with a net worth of a $100,000,000 to people with a net worth of $1,000,000,000 is really who it’s focused on. There’s, there’s a lot of doubt about the veracity of that actually happening from a standpoint of, first of all, how could it even be enforced? How could it be tracked? How could people really place a fair valuation on it? And then there’s some question as to whether or not it’s even legal and, and whether or not it’s, it’s constitutionally, would be voided. So TBD on that, it’s not something a) that I think would impact the vast, vast, vast majority of people. And b), I, I have some doubt as to whether or not it would come in a pass from a practical or legal perspective.
Andi: Okay. Bill says, “I’ve read that the stock market has historically done better under Democratic administrations than Republican administrations. Do you agree?”
Brian: Yes, I agree, because that’s the facts. And we’ll actually go over a few slides that cover that in more detail, so I won’t go into a great level of detail here other than to say that the stock market has done fine under both parties. It’s generally done a little bit better under Democrats, but given how limited the scope of the evidence is, because there hasn’t been that many elections to actually track, I would say markets have done quite okay under both parties.
Andi: John says, “What impact do you think the deficit will have on the market?”
Brian: Another really good question and again, one that we will, we’ll go into deeper. I can tell you that I started in this business in 1996, which dates me a little bit. And, back then people were worried about the deficit. And then call it in the early 2000s, people were worried about it, and in the late 2000s and so on. And, you know, people have been waiting for, it’s like, the boogeyman under the bed where people have been looking for it for a long period of time and they haven’t found it yet. So we’ll see. Right now I don’t think it has much of an impact. Down the road at some point it probably will. But I think that in the near to intermediate term, there are other things to worry about besides the deficit.
Andi: Jim says “What’s happening with the More Homes on the Market Act that increases the $250,000 and $500,000 capital gains exclusions on homes to $500,000 and $1,000,000?”
Brian: Yeah, we’ll see. I haven’t heard any updates on that recently. So, you know, I know that there have been that proposal as well as others. And obviously, as homeowners, especially if you have appreciation would be a good thing. So TBD. My suspicion is that nothing really from a tax perspective that’s meaningful will happen for the remainder of this year, certainly with the election coming up.
Andi: Luke says, “How will this election affect retirement Social Security benefits for seniors?”
Brian: As far as the amount that you get, I don’t think that it will. There’s really- neither party is proposing cutting benefits in any way. You know, it’s, it’s the third rail for a reason. It’s hard to touch and it impacts so many people in the past when Social Security has been impacted. What’s happened is that there was a lot of lead time. So you know, theoretically, if something was to happen from a Social Security benefit standpoint, it would probably impact people that are, let’s say, a decade or more away from actually claiming Social Security. There is one proposal, Trump floated something about not taxing Social Security benefits received anymore. We’ll see if that gets traction or if that was just a balloon that was floated. But right now it doesn’t seem like there’s going to be a huge impact one way or another, regardless of who’s elected.
Andi: Barbara says, “Will you be addressing predictions in real estate?”
Brian: No. No, and I’m happy to take that one offline. But, you know, I don’t have a forecast for real estate other than to say that, you know, it depends as always on a) what sector right? Because there’s a big difference between a single-family house and let’s say a commercial office building. And then b) where is it right and then c) what is the quality. Because there’s also a big difference between Class A commercial real estate right now and in a really good market versus Class C real estate in a mediocre market. So it’s so localized that it’s tough to forecast other than to say that, you know, the fact that the Fed is slightly easing off on interest rates should be a net benefit.
Andi: All right, I’m going to do two more questions and then we’ll get back to the presentation. Bill says, “Congress has a lot to say about what proposals are enacted, but I’ve read that both candidates’ policies would balloon the national debt. Is that true?”
Brian: Yes.
Andi: Okay. And then the last question before we get back to the slides is “Where will you put your money, Brian?”
Brian: Where will I put my money? You know, there’s these casinos by my house and- no, I, I think, look, at the end of the day, first of all, I think compliance would murder me if I gave specifically what I, what I would do there. But I think what, what I’ll say that’s really important is that what I do with my money is based specifically on what my goals are. And my goals and my timeframe and whatnot are different than everybody else’s. And this gets back to the financial planning and marrying that with the investment. Is that the real key is that every single person on here a) probably gets sick of hearing people like me say it depends, but b) really it does depend. Because you always want to be cognizant of what are you trying to accomplish. When do you need the money, right, what kind of margin of safety do you need, because some people are more conservative or more aggressive by nature. And then what’s your tax situation? And then marrying the exact investments to them. What I will say is it’s important to keep in mind that a lot of times what it takes to build wealth is not the same as what it takes to distribute or disseminate wealth. And so a lot of times the steps that you’ve taken to get to a certain point in life may or may not have worked, but they may also not be the steps that are necessary to get you through the next phase of life. And a lot of times as you shift from accumulation to creating a paycheck, the tax perspective comes into play a little bit more and the strategies that you want to put into place may shift a little bit.
Andi: All right. Keep putting your questions into the Q&A and Brian will get to them as he gets through the next round of slides. Thank you, Brian.
Brian: Cool. Thank you, Andi. And great questions. Everybody keep them coming. So let’s, yeah, let’s turn to the slides here. So now we want to shift into does this stuff matter, right? And when you think about things, regardless of what party comes into power, there are certain things that people are going to focus on that, frankly who wins the election probably isn’t going to change. And one is people worry, and this gets back to the question we just had about the deficit and what’s it going to do to the economy, is it going to destroy the dollar, right? Are other currencies going to take over for the dollar? And the reality is that no matter how you measure it, the dollar is such a disproportionately large share of global foreign reserves, of global transactions, of international trading, that the dollar isn’t going anywhere, especially because there isn’t any viable alternative. Then we get questions about China, right? Is China going to invade Taiwan? Are we going to have more trade with China or less? Are we going to start ensuring our manufacturing rather than having it created in China? And the reality is, is that both parties and almost all Americans view China unfavorably. You know, and I’m not trying to be political here, this is just the facts that I’m pointing to, is that when you look over time, people have gone from generally a favorable view of China to a very unfavorable view. And if you look on the right-hand side, that’s the case, regardless of whether somebody’s a Democrat or Republican, has very strong feelings or is more middle of the road. Most Americans today view Taiwan favorably and view China unfavorably. Given that, it really doesn’t almost matter. I mean, I know that there’s a lot of talk from back in the late 2000 and teens that when Trump came into office, right with tariffs and a little bit more of a, antagonistic approach, if you will, towards China, that that could change. But the reality is that Biden has not been, has been relatively, you know, cautious as far as dealing with China and I think that Harris or Trump either way will continue to view China much more as a frenemy than a friend. This I think is one of the more impactful ones and gets back to some of the deficit and Social Security questions. Is this is the percentage of spending that would need to be cut in various categories to balance the budget by 2033. So if you cut all spending, you looked at everything, and you said, all right, we’re just going to take across the board a percentage, you’d have to cut a quarter roughly of all spending to balance the budget. If you said, hey, we’re going to cut spending, but defense- defense is really important and we want to take care of our veterans. So we’re not going to touch that stuff. You’d have to cut a third of all other spending. If you throw Social Security into that and say, hey, we’re not going to cut Social Security either. That’s the third rail. We’re not going to cut defense. We’re not going to cut veteran stuff. Now you have to cut a half of everything else. And if you say, hey, we’re not going to cut defense or veterans. Social Security and Medicare also can’t be touched. Well, now you need to cut 85% of all other discretionary spending. So imagine the government just comes in and cuts 85% of everything else. First of all, some of you at home right now are probably high-fiving whoever’s sitting next to you and blowing horns and celebrating and stuff, and are like, that would be the greatest thing ever. It may or may not be, but the reality is that there’s no way that the government is shutting down 85% of everything that’s not in that slide, right? So, what does that mean? It means that a), the deficit is probably not getting solved anytime soon, the budget’s not getting balanced. It also means that b), the only way it eventually gets balanced is with higher taxes, in all likelihood, right? I can’t guarantee that, but I think that there’s a high probability based on statistics like this, that taxes over time are going higher. Now, whether that’s after this election, whether it’s after 2026, whether that’s at some point further in the future, I don’t know. But I do think it’s important that as you prepare for your financial future, you take into account the fact that you’re in some of the lowest tax brackets of your life right now, that over time, there’s more uncertainty about tax rates. And that in all likelihood, they’re going higher, and that you begin taking steps in order to protect yourself against that, particularly again, as we come into year end. Strategies like Roth conversions, like maxing out retirement contributions, like capital gains or capital loss harvesting, all have 12.31 deadlines that you need to begin to focus on, sooner rather than later because we’re into October already. Next slide. You know, this was a question about do things do better under what party or when or this? So this is just how have financial markets done in various years of our presidency, year one, two, 3, and 4, depending on, hey, is it a first term, second term President or whatever? And the reality is that every single one of those columns is positive, right? And if we look at year 4 of a first-term president, up 12%, second-term president would be the only one that’s negative down 4% and average is 7%. So there’s no statistical evidence that says that, hey, either in an election year or in year one of a presidential term, markets don’t do well. The evidence is that markets have done just fine regardless. Again, not to say the rest of this year or next year couldn’t be the exception to the rule, but it’s a rule for a reason. Next slide. And then when we look at who’s in office, right, we have some data here, more so than most. Because we have two people running, one of whom, this was even more true, 3 months ago, but we have somebody running that’s been in office, we no longer have the incumbent President running. But we do have somebody running that is the Vice President right now and in some ways is seen as continuing many of Biden’s policies, and the reality is that in the first 365 days under both Trump and Biden markets did quite well. You can see that under Trump in the first 365 days, the market was up significantly and it was up even more so under Biden in the first 365 days. So, under both of the administrations, there seems to be some sort of track record in addition to the historical evidence of markets doing okay. Again, no guarantee, but also not necessarily laying out any reason that it’s time to get out of markets today. Next slide. This gets back to the previous, one of the questions that we got about have markets done better under, Democrats, Republicans, etc. And you can see a breakdown of various things here where you’ve got, partition control from a Democratic house and a Republican, or excuse me, Democrat Senate, Republican House and a Democrat President all the way through, on the right-hand side, a Democrat Congress and a Republican President. So every possible mix from 1933 to 2023. You can see that the actual best outcome has been when you’ve got a Democrat in the White House and a split Congress. Markets seem to like split government, huh? I mean, the next best is a Republican Senate, a Democrat House. So again, split government with a Republican President. And then the next best one is when you’ve got the White House and Congress split. So, a split government hasn’t necessarily been bad for markets. But it can see that even in the worst-case outcome, which is a Republican President and a Democratic-controlled Congress, markets have still averaged 5% returns. I think it’s also important to point out, like I mentioned, the number of instances of some of these occurrences isn’t that great. So statistically, you know, if you were a statistician, you’re looking at some of this. It’s not completely perfect, but it’s what we have. The other thing is to keep in mind that there’s always a backdrop of what’s going on in the world that has nothing to do with the President. The reality is that if you looked at how the market has done under various Presidents, it’s done just fine regardless of who was in office and when markets haven’t done well, a lot of times it has nothing to do with the President. So, for instance, under George W. Bush markets had just about their worst return under any President. But when you think about his term, he started in office right as the dot com boom was cresting and then collapsing. So you had one of the worst stock markets in history. And it’s easy to argue that that had very little to do with George W. Bush. And then at the end of his term, you saw the financial crisis, and we could argue whether or not any of the housing boom and bust was his fault or whatever. But the reality is, is that in those two market environments, it would be tough for almost any President to see good market performance. As you can see here too, this is just on the top, looks at how the economy has done in addition to the stock market, and you can see that, generally speaking, the economy has done fine, no matter who’s in power. And guys, these figures make sense, right? Because think about the long term, right? Over time, the economy tends to grow. Human progress powers the economy. Think about standards of living, right? Think about the billions, literally billions with a B, of people that have been lifted out of abject poverty in the last 50 years to maybe not the kind of standard of living that we know, here as we’re really fortunate, but still a standard of living that’s way higher than it used to be. The number of people living on a dollar a day or two dollars a day has been slashed dramatically in the last 50 years. Think about the developments that we’ve seen around the fact that, hey, if you don’t live by your kids or grandkids, you can FaceTime them, that you’ve got jet travel, that you’ve got vaccines for diseases that used to kill millions of people. All of those developments have nothing to do with politics. But they power the long-term growth of the economy and then some company is usually making those right? And even things that start in government like the internet was started in depending on on what you hear either by DARPA or by CERN right, by these government entities but then was commercialized and has changed our lives completely and so companies make money off of these developments. Those developments turn into corporate profits, and those corporate profits long term lift the economy, they lift the stock market. So there’s this long-term tailwind that investors have, and that consumers have, that tends to power things forward regardless of politics. So these charts that we’re showing all make a ton of sense. Again, this is just another way of looking at, depending on Congress, blue Democrat, red Republican, and then purple. Overtime staying invested has worked, right? That, yeah, there’s been ups and downs, but you’ve done quite well. Let’s move on to the next slide, please. I like this one here. Washington, you know, at the end of the day, right, Washington’s not gonna change. We could drive ourselves crazy talking about it. But they’re finally seeing eye to eye, right? I will never cut entitlements, and I will never raise tax revenue. And they’re finally agreeing. At last Washington can agree on something. Let’s pause there for a moment and take additional questions before moving on to talk a little bit more about the markets today and potential impacts.
Andi: “What impact will BRICS have on the future economy and on markets?”
Brian: Yeah, good question. So BRICS is an acronym started by an economist at Goldman Sachs, I believe it was in 2005, and it was an acronym for Brazil, Russia, India, and China, which at the time were 4 of the really large developing economies. Later South Africa got thrown on there for the S to make BRIC, BRICS. Today it’s a quasi-formal or quasi-informal, depending on how you want to look at it, group of, I believe there’s about 13 countries in it now. And really, this is a couple things. One is it’s a catchy acronym, two, it is some large emerging markets. And 3, it’s a group of countries that comes together to talk about economic policy. And in some ways, it prompts fear among some people. Recently, some of the countries admitted to this group where Iran and Ethiopia, a few others like that, Saudi Arabia, and so it’s like, hey, are this group of companies now going to dominate the, or countries rather, dominate the economy globally? I don’t spend a ton of time worrying about it. When you think about it, first of all, to coordinate any kind of meaningful policy is really difficult to do when you take a country like Russia and a country like, I don’t know, Brazil, which have very little in common other than that they’re developing economies. Multiple of the BRICS, including Russia and Iran, are internationally excluded from the global trading system, so they’re not even part of international capital flows and trade. And many of the countries, even though they’re in this loose group, are strategic rivals. So Saudi Arabia and Iran are rivals. Some of the other countries are rivals- where China and India are strategic rivals. And so the idea of them coordinating to conspire against, let’s say, America, might happen from time to time on a few issues, but I don’t think it’s gonna happen more broadly. The last thing I would say is that there’s talk about them issuing a currency. The head of South Africa said that that’s never been discussed, but it doesn’t stop the press from speculating. Again, in order to issue a joint currency, they would need to coordinate monetary policy, which I think there’s effectively a 1% chance of that. And even if they did their share of the global economy, you know, do you, do you want to own a currency issued by Brazil who has defaulted on their government debt and had 7 different currencies in the last 40 years? Or do you want the US dollar, right? Do you want Ethiopia, which is one of the poorest countries in the world, or do you want England? Do you want- right? I could go on Japan or, or this or that. I think that the odds on a BRIC currency really meaningfully replacing the dollar are effectively zero.
Andi: Let’s see. Raymond says, “What does current wars in the Middle East and Ukraine have on inflation and the economy? What are your predictions on the rate of inflation in the next 12 to 24 months?
Brian: Geez, that’s a tough one.
Kathryn: Crystal ball.
Brian: Yeah, the rate of inflation, will be somewhere between 0% and 10%. Yeah, I don’t know. I mean my guess is that inflation I think I’ve got a slide coming up on inflation. So we can talk more about that in a minute. As far as far as the wars I don’t think- so Ukraine. I don’t think has a ton at this point. There was a period of time where some of the mostly through commodities, right? So some of the wheat prices and grain prices the impact from the war when it started spiked inflation a little bit and you can see a similar effect going on with some of the oil price increase from the Middle East. But I don’t think it’s tremendous. I think the bigger impact on inflation is Federal Reserve policy, global economic growth, how independent or increasingly less independent the central banks are, especially the Fed. And then, and then the final one, which I think is pretty thematic is, as more and more companies near shore rather than offshore supply chains, right? So if you take your, I don’t know, hypothetically, if you used to make the Apple iPhone in China, and now you move that closer to the US or to more perceived friendly nations, does that raise your cost of production? Does that cost need to be passed on to consumers? I think that those items are far more impactful than what’s going on right now.
Andi: All right, I’m going to give you 3 more questions now, and then we’ll get back to into slides if that works for you.
Brian: Ah, two, two max.
Andi: Two, okay. “I understand the President can raise tariffs without congressional approval. If Trump raises them as much as he has said, what is the impact on the economy and on prices?”
Brian: Yeah, it’s, generally speaking, tariffs are a negative for economic growth and they lead to higher inflation. I mean, that’s what the textbook would tell you, and that’s historically been. But you know, I’ll say this. I think I’m trying- It’s always hard to talk about any politician and maybe Trump more so than the most without sounding political. So I don’t want this to sound political or approval or disapproval. This is completely neutral is, he spent a long time in the business world, more so than almost any other person that’s been President or in the political arena. And in order to succeed there, you need to have at least some commercial instincts. And so I do personally have a degree of confidence that although he certainly has views and his base and policies he wants to interact or enact, I also think that he’s savvy enough from a business perspective that if tariffs got to the point where they were going to sink the economy or crater business in America, I think he’s smart enough to realize that point and probably not cross over it. That’s just my opinion.
Andi: Okay, final question before we get back to slides for the moment. “Is the market overbought? Any predictions on short-term direction?”
Brian: No. And that was no to the second point. I, I have no opinion on short-term direction. And, you know, so here at Pure, for those that are clients know this, but for those that aren’t, we don’t try to time what the market’s going to do in the next 15 minutes or 15 days. Simply because, in our experience, it’s virtually, it’s not impossible. It’s really, really difficult to do. And it’s really, it’s not so much getting it right once in a while, it’s getting it right again and again. And when it comes to most people’s goal is to save for retirement. And in order to do that, you need to be right consistently and to be right once or twice is, is not going to cut it. So we tend to focus more on what we think asset classes will do long-term strategically. And then make maybe tactical shifts around that, but it’s more setting a target allocation and then managing around that in order to meet somebody’s goals. What I will say is when you, when somebody asks a question like hey is the market overbought, I think that there’s a key qualifier that’s, needs to be added to that question. It’s, what are you talking about when you say the market, right? Because there, the market is massive and, and my guess is most questioners would mean the S&P 500. But maybe they mean the NASDAQ, maybe they mean the DAO. Maybe they mean the Russell 2000. Maybe they mean big companies or small. Maybe they’re talking about Japanese stocks or Chinese stocks. Maybe they’re talking about bonds or commodities. There’s so many different markets that the reality is that there’s almost always something that’s overbought. And something that’s probably more reasonably priced. And the trick is to either a) time your way perfectly in and out of those various things that are over or under-bought, which is hard to do. Or b) maybe own a little bit of everything so that you can get the blended average of those over time and meet your goals. 2024 election. Here, let’s talk about, here comes the question on inflation. So inflation is moderating, right? You can see here on this chart, we had the big spike up, right? Post COVID and we went up to 9%, which was the highest since the 1970s. We’ve since come down and we’re at sub 3% now. So that, that gave the Fed really confidence to begin cutting interest rates. The key is, will inflation continue to moderate? My personal guess is that it probably will, or at least stay somewhat moderate. It, it’s already moderate. Right. But I don’t think we’re going back to the levels consistently that we saw in the 1990s, or excuse me, in the 2000s, right? Where inflation was consistently running at 1% or 2%. I, my, my personal guess is that maybe that 2% to 4% is more the, the new normal, if you will. And 2% is what the Fed targets. So we were under it for a long period of time. We could be over it by .5% or 1% or whatever for a long period of time and still average out to that 2%. So, I, I don’t think inflation is going back to the levels we saw where 7%, 8%, 9%. At the time I was pretty critical of the Federal Reserve. Still am for what they did back then. Although I think historically the Fed has done a really good job. I think they kind of missed the ball there in 2020, 2021. The other part of inflation going a little bit higher is that the unemployment rate, or excuse me, a little bit lower, is that the unemployment rate has started ticking higher. So you can see here a little bit of the U shape on the unemployment rate, but still at really low levels. But you flip to the next slide when the Federal Reserve has a dual mandate of moderating inflation and maintaining full employment. On the next slide you can see the federal funds rate and you know now that this is why the Fed felt comfortable cutting interest rates at their most recent meeting is because both sides of the mandate are kind of going in the right, in a particular direction, right, where inflation is moderating, the unemployment rate is ticking higher. Both of those say, okay, we want to ease monetary policy a little bit, ease financial conditions a little bit. So the Fed went in and cut interest rates 50 basis points. I don’t think, I think that we’ll continue to see some Fed rate cuts. I don’t think we’re going back to the 0% interest rate policy that we saw for a while. And frankly, you hear a lot of people saying, Hey, the Fed should cut. I want to see a lot of rate cuts the market. If you look at the data, the more aggressively- this is based on data, right? Historically, the more aggressively the Fed cuts interest rates, the worse the stock market has done. Right, which sounds odd, right? Like, everybody wants the Fed to cut rates, but stocks have done worse. If you think about why does the Fed aggressively cut interest rates? Usually because things are going bad, right? The stuff’s hitting the fan. So when the stuff’s hitting the fan, the Fed’s like, Oh shoot, we better cut pretty quick. That’s usually not a great backdrop for stocks. What’s actually been a good backdrop for stocks is when the Fed gradually cuts interest rates, because that usually means that they’re easing monetary policy. They’re providing support for the economy and for companies, but it’s not an emergency either, right? It means that the economy is gradually slowing down, which is an okay scenario. This, this slide here is, is a little bit hard to, to read. And, and the goal on this one is really not to, not to be able to read everything it’s more just to see the different markets and the fact that all these lines are going higher, right? So there’s a half dozen, 7, different markets on here everything from international stocks with the MSCI IFA to emerging markets, to the S&P, etc. They’ve all gone up in the last 12 months. So it’s been a pretty good time to be an investor. Again, it gets back to all the things that go on in the world, and yet markets have done okay, right? We have had worries about, I think 12 months ago, we were worried about, depending on the day, either inflation being too high and out of control or the economy going into a recession. And when would the Fed cut interest rates? And what would happen with the upcoming election and political assassination? You know, and so on and so forth, and yet, despite it, all markets have done pretty good. Which I think is instructive. The other thing I would say is that you can see that in that period of time, the NASDAQ did the best, but it’s also been the most volatile. This is a 12-month chart. The NASDAQ is very heavily focused on technology stocks. If you looked and drew this back another year or so, what you would see is that the NASDAQ’s performance, those big technology companies, much more in line with all the other indexes, but with a lot more volatility. So the upsides have been grander, but the downsides have been a little bit more painful too. Next slide. This looks at different sectors. And again, there’s a ton of lines on here to prove a point is that in a perfect world, last, so this is the last 90 days I would have bought the brown line, right? The orange or whatever color that is, which was real estate. And I would have bought the utilities, which was the next best performer. And I would have avoided energy and, and, technology, right. Which were the two worst performers. That’s really, really, really hard to do, right? So what I might do instead is I might buy a little bit of all of them and make sure that I’ve got exposure to all the different sectors in order to own the fat middle. And so one thing I would, I would urge everybody to do is look at your overall allocation and see what your sector concentration is, what your mix of big companies, small, technology, utilities, etc., US, international, to make sure you’re not overly concentrated. We see a lot of portfolios come towards us, that are overweight technology companies, in particular, the big technology companies, when they’re doing the best, as they did the first half of this year, that’s great. When they do almost the worst like they did in the last 90 days, that’s a lot less good, right? Furthermore, how many people and be honest here I’m, I can’t see you so I can’t ask you to raise your hands, if I asked you all 3 months ago, what the best sector would be in the next 90 days, I guarantee that almost nobody would have said real estate. Because all you hear about is how real estate is going to zero. Malls are going out of business. Nobody goes to the office, etc., etc. Yet the best performing index or sector in the last 90 days has been real estate. The second best has been utilities and who even thinks about utilities, right? Everybody wants to own NVIDIA and NVIDIA has been great obviously. Utilities have been a play on AI because of the fact that it’s so energy intensive, the utilities need to generate all of it. They’ve benefited with a lot less volatility than, than the NVIDIAs or some of the AI startups and the like. So again, having a appropriate mix of different sectors, different types of stocks is vitally important if you want to meet your financial goals, but also if you want to meet your financial goals while you’re able to sleep at night. Next slide. This is just another way of looking at asset class performance. Financial advisors love this one. It’s called a quilt chart and really what it does is it stack ranks different asset classes in different periods of time. I can see this one has year to date, one month, etc., up to a year, 3 years, 5 years, 10 years. Just different investments and I think the key is to look for the pattern and then realize that there isn’t a pattern. And it doesn’t matter what time frame you look at, there’s different things do better in different periods of time, right? So again, you get back to the last 6 months, real estate’s the best performer. Before that, not so much. When you look at something like, I don’t know, commodities, right? Commodities over 3 years have been one of the best or the best, right? But if you look in the last year, they’ve been the worst. And so the leadership rotates constantly. And again, it’s about finding a happy path through the middle. In our experience, most investors aren’t trying to pick the single best investment. But what they want is they don’t want to be at the bottom. Because if you’re at the bottom, you’re not meeting your financial goals. If you’re at the top, you’re meeting your financial goals, and maybe you get some extra on the top. But most people need some sort of moderate return. Maybe they don’t need 12%, maybe they need 6%, or 5%, or 7%, or 8%, or 4%, or whatever it is. But what they need is they need to not get 0%, or -20%, or something like that. So getting a mix of different investments designed to meet the return profile you need with the right amount of risk is really key. And this holds true regardless of who wins the election. I want to end with just a couple slides here on bonds. This looks at different types of bonds. At the top is the 3-month treasury. Then the yellow is the two-year treasury. And then at the bottom is the 10-year treasury. And what you can see is that if you flash out towards the right-hand side of the screen, as interest rates have come down, the 3-month treasury has been much stickier, where two-year and 10-year treasury rates have come down a lot more. And let’s look on the next slide at the impact of that. But before we switch to the next slide, I want to ask how many people, a year ago might have said, Hey, I can get 5.5% for cash or a 3-month treasury or a CD, why would I want to buy a bond that’s going to get me 4.5%? And it’s because you’re not locked in at 5.5%. You don’t get the benefit of declining interest rates and those yields come down over time. Hey, maybe you want to buy the bond. Now look, let’s look at what happened is at the bottom. You can see the 10-year treasury has come down quite a bit in the last 12 months. Then look at the performance of different kinds of bonds at the top. Is that, that 5.5% T-bill a year ago earned you 5.5%, 5.38%. But look at all those bonds that were only yielding you 4.5%. Why would I want to buy a 5 or a 10-year bond at 4.5% when I could get 5.5% for a 3-month bond thing? It’s because in the last year, you’ve gotten 15% for corporate bonds or high-yield bonds or 11.5% for a diversified bond portfolio as interest rates have declined. And so this gets back to the fundamentals of investing, how you need to figure out what makes the most sense across time, not just in the moment, easy trap to fall into where people think, Hey, the yield curve is inverted. I can get more for my short-term investment. Why don’t I concentrate there? The reality is, is it turns out it would have been the absolute worst thing to do 12 months ago. But easy mistake to make. We’re talking about the election markets, the economy, etc. But at the end of the day, it all comes down to this. First of all, do your financial planning, figure out what rate of return do you need, required rate of return, to meet your goals. And then build a portfolio that will get you there with the a) the highest probability of getting there, b) the least amount of risk possible, and then c) what are you going to do about your taxes? Because at the end of the day, taxes are going to take way more out of your pocket than a sell-off in the market ever will. You will get hammered with taxes if you don’t plan appropriately. Those are the things you need to figure out. And then, elections are going to come and go, market cycles are going to come and go, but if you can manage around these two things, they can become your true North, and you can modify your finances and your portfolio across time. For those of you that are clients, and I’ll wrap up with this and then take more questions, please, if you have questions on any of this, reach out to your financial advisor, have a conversation with them, or a follow -up. I’m happy to discuss that with you as well. Let them know if you want to chat with me one-on-one, but talk to your advisor about everything we covered today. If you’re not already a client, we do offer free financial assessments, especially as we come in here towards year-end. We get super busy, but we’ll get you in, we promise. There’s no cost, no obligation, but if you want to dive deeper into your portfolio, get a snapshot of how it’s allocated, whether or not you have too much or too little risk in one sector or another. Or if you want to look at tax strategies and see if, hey, with year-end coming up and potentially higher tax rates over time, does processing Roth conversions, or does contributing to this account or that account, or does tax capital management of your capital gains from a tax loss harvest or tax gain harvest make sense? Or any other just financial questions, Social Security, etc. Talk to us. We’re happy to have, like I said, we get really busy this time of year, but we’ll meet with you one one-on-one, spend a couple hours with you, giving you some guidance, no cost, no obligation. Reach out to us, let us know. Again, if you don’t do that, at least talk to somebody. Otherwise, you could pass a year go by where you don’t get to put into place some of these financial things that have a 12.31 deadline, particularly around taxes. The clock is ticking on all that stuff. Make sure you take action, whether it’s talking to your financial advisor here at Pure, seeing us for a free financial assessment or talking to somebody else, well ahead of time, you don’t want to wait till December 15th and try to figure out what to do for year-end tax planning. With that, let me see if there’s any other questions.
Andi: “What about the price of gold?” What about it?
Brian: What about it? You beat me to it. We’re like a mind meld.
Andi: Yeah.
Brian: You know, it’s funny. I looked at the price of gold before I came in here because I was like, somebody’s going to ask this question. Yeah, you know, I mean, gold has done really well lately. If you look at gold in the long run, the return is zero. It hasn’t done well. If you look in the last year, it’s done pretty good. But, you know, compared to what? Compared to what other asset classes? Because when you start to compare gold to tech stocks or cryptocurrency or this or that, suddenly the returns from a comparative perspective still don’t look quite as well. One thing to keep in mind with gold is, how do you value it? Right? Because there’s no cash flow. So you’re essentially trying to forecast whether people pay for it down the road, which is just fundamentally a different exercise than some of what we do. And then how do you size it in a portfolio? Because a lot of times gold is a hedge against either a) high inflation or b) like really bad events like geopolitically or in the economy. In order to protect against those two things, you need to have enough gold that it protects against you, but not so much that it drags your portfolio down to more normal times. I think gold is a tough thing to size in a portfolio. Quite honestly, I think with cryptocurrency now, and we’re not big proponents of crypto necessarily, but I think that you can solve for some of the things you would with gold, but with crypto, and I do think that if you do own gold, it should be a pretty small percentage of your portfolio.
Andi: And then we have another question. “Mortgage rates?” Question mark?
Brian: Yes, they exist. Yeah, I, you know, I think mortgage rates will follow, they don’t follow specifically the Federal Reserve, even though the Federal Reserve has started cutting interest rates. What they tend to be priced off of is 10-year treasuries. And 10-year treasury bonds are a function of a) what the Fed is doing, but b) future inflation expectations, and then expectations for what the economy is going to do. All else being equal, those rates have come down. They’ve gone up since I probably put the slides together in the last couple of weeks, but they’ve come down over the last 12 months, which has brought, mortgage rates down from their highs. If you continue to see those rates moderate, you’ll see mortgage rates go down. But I don’t know. I think if you’re waiting to refinance your 4% mortgage, you’re going to be waiting for a while. If you’re waiting to refinance your 6.5% mortgage, you’re probably getting closer to where the fees make sense and you, and you might get there. And let me, let me just add one more thing though, is obviously lower mortgage rates are good for the housing market. And I think there’s a sense that because mortgage rates were so low for so long that now they’re exorbitantly high. When you look historically, a 6% or 6.5% mortgage is pretty fair. I’m sure that there are those of you out there that had a double-digit mortgage back in the day, right? So at the end of the day, and as we’ve seen with house prices, is that a 6%, even a 7% mortgage doesn’t necessarily have to crater the housing market, it just affects affordability a little bit, but historically it’s not out of the norm.
Andi: Okay, real quick. Pete, your question is pretty specific, so I would suggest using the link in the chat to either email us or to schedule a free financial assessment to determine the strategy that’s best for your needs. I’ve got another quick question. “What are considered other investments besides the stock market?”
Brian: Yeah, so I mean, a) it’s a huge category, right? But I think when you think about asset classes, there’s really a few, broadly speaking, there’s stocks, or equity, right? Equity is an ownership share in a company. There’s bonds, which is or fixed income, which is essentially lending. You can lend to the government with government with treasuries or municipals. You can lend to a company with corporate bonds, mortgage-backed securities. Then there’s a big category of alternative investments. And depending on how you want to category that, it’s anything that’s not stocks or bonds, but it might include things like real estate, which there’s all different kinds of real estate. It could include private equity and private credit, which is, similar to, really similar to stocks and bonds. It’s just in the private markets, funding there’s hundreds of thousands, if not millions, of large private companies that aren’t raising money in the public capital markets. So those can be great investments. And then there’s non-correlated or non-traditional assets, things that are more market neutral that are designed to move independent of stocks and bonds. And all of those could very well make sense. Again, it comes down to what your right circumstances are. But in some instances, combining all of those could make sense. Or combining multiple of them could make sense to meet your goals in in the least risky way possible.
Andi: And then a final comment. “Confirming my understanding from your talk, keep doing what Pure Financial has been recommending and manage my taxes. Don’t worry about the election or any other noise.”
Brian: Yeah, that, that almost sounds like a plan.
Kathryn: It’s from your mom.
Brian: Thanks Mom. We’re home for Thanksgiving now. Yeah, no, I think that was better said than I probably could have said, a) is not surprising and, b) thank you. Yeah, I the elections come; elections go. Not that this isn’t important, but from an investment perspective, I think the long run tax planning is more important. I think managing your cash future cash flow mapping that out income expenses, etc. And then figuring out what portfolio is going to help you get there, what makes it, what we mentioned, right, stocks, bonds, other types of investments. And then tax managing that in order to distribute income back to yourself down the road in the most tax-efficient way possible. That’s the key. And then the rest of it is noise, and in a lot of ways, there’s a cartoon in there that isn’t up right now, but it’s a picture of somebody with headphones on and people are freaking out because there’s some turbulence and somebody’s screaming, I’m going to, we’re going to die. And the person turns the other person says they must be a financial reporter. And then to me, financial advisors, a good financial advisor, whether at Pure or at another firm, is like the headphones where it helps you drown out the noise to focus on what really matters, which is meeting your long-term goals.
Andi: Brian Perry, CFP®, CFA. Thank you so much for taking the time today. Thank you all so much for joining us.
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Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed You are encouraged to seek tax or legal advice from an independent professional.
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