Decision 2020: Your Vote and Your Money
Welcome to Decision 2020: Your Vote and Your Money. This special series will examine the outlook for November’s elections, the potential impacts on markets and taxes, and steps you can take now to election-proof your finances. Make sure to check back often so that you don’t miss any of this special series, in which we’ll cover topics including:
- Who Will Win the Race for the White House?
- Will the Next Congress be Red or Blue?
- Do Elections Even Matter for Markets?
- Are Your Taxes Heading Higher?
- Can You Build an Election-Proof Portfolio?
Election Wrap Up
Welcome to Part Six of this special series Decision 2020: Your Vote and Your Money. Welcome to Part Five of this special series Decision 2020: Your Vote and Your Money. In the first installment, we examined the race for the White House, as well as where the candidates stand on some important economic issues. Part Two focused on the legislature and took a closer look at the outlook for the House and Senate races, while Part Three evaluated the historical record to see if elections even matter to markets. In Part Four, we examined the critical question of whether your taxes are headed higher and laid out some steps to potentially reduce your future tax burden, while in Part Five, we looked at some ways you can election-proof your portfolio.
Now, in this final chapter, we’ll take a quick look at what happened on November 3rd and what it all means for your finances.
What’s the Outlook for a Joe Biden Presidency?
After several days of uncertainty, and despite a better than predicted showing by incumbent President Trump, Joe Biden has been elected as the 46th President of the United States and will be sworn into office on January 20th, 2021. In the interim, Donald Trump will remain in the White House, albeit as a “lame duck” President. Traditionally, it has been difficult for Presidents to pass major legislation when transitioning out of office, but there is certainly room for Trump to continue to enact parts of his agenda. But, given that the Biden Administration would be able to quickly undo any actions they strongly oppose, it should be expected that the next several months won’t see significant developments on the political front. However, it is possible that with the election out of the way, further Coronavirus stimulus could be forthcoming if the White House and Congress can find a package they can agree on.
While Trump continues to govern the country, Biden and his team will be preparing for their transition. From a financial point of view, market participants and economists will be closely monitoring several key developments.
For starters, look for continued announcements around Biden’s economic stimulus plan. Most in Washington agree that additional stimulus is needed to see the nation thru the Coronavirus pandemic, but to date, Republicans and Democrats have been unable to agree on terms. Biden’s task will be to formulate a package that all sides can agree on, particularly if an additional stimulus is not forthcoming before he takes office.
Another key area of focus will be taxes. On the campaign trail, the Biden team floated a variety of proposals. Many of these would seek to raise taxes on higher-income earners. While the President-elect’s ability to change tax law will be limited by Congress, markets will pay close attention to any additional details of the proposed agenda.
Finally, a key task each new President faces is appointing cabinet secretaries and other key administrators. Investors will focus on Biden’s nominees for Treasury Secretary and Commerce Secretary. Additionally, markets will be sensitive to any updates Biden gives on his inclination to reappoint Fed Chairman Powell when his term expires in 2022.
What Party Will Control Congress?
As expected, the Democrats retained control of the House of Representatives, though contrary to expectations, they did see their majority diminish. As of November 9, 2020, the Associated Press had projected the following for the House, with 24 races still to be decided.:
While the Democrats are expected to retain control of the House, the Senate is still up in the air. The Republicans have been in control of the Senate but headed into the election, it looked like the Democrats could flip it. However, a better than expected showing by several Republican candidates has led to a scenario where the Senate could remain Red. The final outcome likely won’t be known until January because there are two crucial races in Georgia headed to runoffs.
If the Republicans retain control of the Senate, they will likely stall some of Joe Biden’s agenda. However, if the Democrats win both Georgia seats, the Senate will be split 50/50. At that point, Vice President Kamala Harris will serve as the tie-breaking vote, which would give the Democrats effective control of the Senate. Obviously, this scenario would provide a platform for Biden to operate more freely. On the other hand, a divided government will lead to either gridlock or compromise, depending upon the Parties’ willingness to negotiate.
Before moving on, it’s important to keep in mind that party leadership of Congress has fluctuated repeatedly over time.
It’s natural to worry about the direction of the country if your preferred party doesn’t win. But before you consider abandoning your financial plan or moving away from your strategic investment allocation, remember that the reality is that America has seen both Democrats and Republicans in control of the House and Senate. We’ve also seen many instances with a divided Congress. Despite it all, the country has moved ahead. The economy has grown. Markets have moved higher.
Of course, this time may be different.
But it probably won’t be.
With the Election Out of the Way, where are Taxes Headed?
As stated above, markets will eagerly watch for any further clarification around Biden’s tax agenda. And his ability to pass any tax changes will be heavily dependent upon who controls the Senate. But regardless, it seems likely that even if taxes don’t head higher next year, the long-term path is higher.
There are a lot of numbers on the graphic above, but I want you to focus on just two of them. First, look at the U.S. National Debt number. That’s the one that is nearly $27 trillion. That’s trillion with a “T.”
Then look at the debt per citizen. That’s right, Uncle Sam owes more than $80,000 for each and every one of its citizens. Unfortunately, the government is only collecting a little over $9,000 per citizen. If a business had those economics, it would have to get more clients or raise more revenue from existing clients. Otherwise, the company would go broke.
Well, the U.S. can’t just go and get more “clients.” The country’s population is what it is, and while it is growing, it isn’t likely to spike anytime soon. And the government probably isn’t going to go bankrupt either. That leaves option number three: Collecting more revenue from every citizen. And that revenue must come in the form of taxes.
It seems likely that at some point, taxes will move higher. That was the case before the election, and it remains the case in the election’s aftermath. Once you accept this, you can then focus on steps to mitigate any future tax increases. The key to doing so is tax diversification, which you can learn more about in this Your Money, Your Wealth® podcast.
What Does the Stock Market Think of the Election?
The stock market has voted, and at least so far, it approves of the election outcome.
In fact, stocks have done quite well since before the election and have continued their upward progress in the week after the election.
Here is a one-month chart of the S&P 500, thru November 12th:
As you can see, the S&P had been falling during the month of October, but as the election approached and the outcome came into focus, a rally began. That rally continued over several days of uncertainty when it was unclear who the next President might be. And the rally accelerated once the race was declared in Biden’s favor.
Part of this may be that the market is comfortable with a Joe Biden Presidency. And part may be that it appears there is a reasonable chance we will have a divided government, which some people prefer. But it is important to note that in addition to the election, we are also still dealing with COVID-19. And with Pfizer recently announcing positive vaccine test results, it could be that we are moving closer to an effective solution to the pandemic. And that, more than anything else, is what the economy needs to recover and prosper.
What Changes are on the Horizon?
Well, next year will probably hold lots of surprises, but given that last November no one was lining up to predict a global pandemic in 2020, I think it’s best to take any forecasts with a grain of salt. Nevertheless, here a few items you’ll want to keep an eye on in the months to come:
- Biden’s White House transition
- Who will be appointed to key cabinet posts?
- What initial agenda does he layout?
- Biden’s tax and economic proposals
- Will actual proposals be similar to campaign rhetoric?
- Taxes may go up, but how much?
- Another round of stimulus
- Will we get more economic stimulus either prior to or after the Presidential transition?
- If so, how much and what form will it take?
- The outcome of the Georgia Senate races
- Will a Republican victory lead to a divided government?
- Will a win for the Democrats lead to a Blue Sweep?
- An effective COVID-19 vaccine
- When will enough people be inoculated for the world to return to “normal”?
The outcomes of these events will play a significant role in determining the outlook for financial markets over the next year or so. But it’s important to note that there will also be important but unanticipated developments that will move markets. In fact, it’s often the case that the largest financial events aren’t things on investors’ radars. Rather, it’s the surprises that come out of left field that really move the needle, for better or for worse.
Don’t believe me?
How about 2020 and COVID-19?
What Changes Should You Make with Your Finances?
Of course, there’s the Big Question too: Now that the election has passed, what changes should you make to your finances? If you haven’t already done so, you might want to revisit your financial plan and strategic asset allocation. This isn’t so much because of the election, but more just because of all the market volatility we’ve seen this year, as well as the possibility of higher taxes down the road.
But if you’ve already checked in on your long-term planning and everything still looks ok, you probably don’t have to do a whole lot right now. Unfortunately, staying the course is boring financial advice. But it works.
And don’t worry if you crave excitement. It’s only three more years to the next presidential primary.
And if you can’t wait that long, there’s another Congressional election in 2022, and control of the House and Senate will be up for grabs once again.
With that in mind, let’s finish this Decision 2020 Series with two more charts. These charts look at the long-run performance of stocks under Presidents and Congresses from both parties. What you’ll find is that, in the long run, stocks have done just fine, regardless of who’s in office.
Hypothetical Growth of $1 Invested in the S&P 500 Index and Party Control of Congress
January 1926 – December 2019
Markets Have Rewarded Long-Term Investors under a Variety of Presidents
Growth of a dollar invested in the S&P 500: January 1926 – December 2019
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