As citizens and investors, the upcoming election will drive policies that will help shape our economy, the markets, and our lives. The three most likely scenarios (and implications) are below.
- President Trump wins a second term and Congress remains split between a Democratic House and a Republican Senate. This will be more of status quo.
- The Democrats sweep the White House and Congress. This likely brings higher taxes on corporations and wealthy individuals, re-regulation of some industries, and more stimulus.
- Former Vice President Joe Biden wins the presidency, but the Republicans hold the Senate. Changes would likely be muted by a GOP Senate.
Below we’ll discuss five key areas and the implications to you as an investor.
- Stocks: The stock market (as measured by the S&P 500) tends to move higher regardless of which political party is in power. In addition, there is little difference between when the White House and Congress are united or divided. Since 1937, the 5-year annualized return of the S&P 500 averaged 11.62% when the president and Congress represent the same political party. Over that same time frame, the 5-year annualized return of the S&P 500 averaged 11.40% when the president and Congress represent different political parties.
Sources: Senate.gov and House.gov. Congressional sessions run two years (e.g., the House became Republican in the 2016 midterm election and served from January 2017 to January 2019).
Sources: Morningstar and Hartford Funds. Data starts on January 1 of the year following each November midterm election. US equity is represented by S&P 500 Index.
Performance data quoted represents past performance and does not guarantee future results. Indices are unmanaged and not available for direct investment.
Implications: Expect more short-term volatility as we approach the election. But don’t let that deter you from putting your money to work, as economic fundamentals tend to drive stock performance more than who is in the White House. Trends like digital payments, e-commerce, autonomous vehicles, and health care innovation create opportunities for stocks to advance over the long-term.
2. Taxes: Over the last four years under President Trump, taxes on the corporate and individual level have come down. Biden has proposed increasing the top tax rate on corporations from 21% to 28%, and for individuals from 37% to 39.6% (the previous top tax bracket under the Obama administration).
Implications: Although an increase in individual and corporate taxes would negatively impact corporate profits, historically it has not impacted the stock market. Market historian Denise Chisholm says “…In the 13 previous instances of tax increases since 1950, the S&P 500…has shown higher average returns, and higher odds of an advance, in times when taxes are increasing”. (Chisholm analyzed stock market performance in the calendar year when there were increases in federal personal, corporate, and capital gains taxes, plus the year prior and the year after).
3. Trade: There is bipartisan support to get tough on China, so although the tactics of trade policy may change depending on who is president, trade is unlikely to affect the markets as much as other implications like fiscal policy.
Implications: Regardless of the election, it is prudent to have a mix of both U.S. stocks and International stocks. In fact, 75% of the top stocks since 2011 have been based outside the U.S.
Sources: MSCI, RIMES. 2020 as of 5/31/20. Returns in U.S. dollars. Top 50 stocks are the companies with the highest total return in the MSCI ACWI each year.
4. Regulation: A Biden presidency would likely bring scrutiny to industries such as energy, health care, and large technology companies.
Implications: We are monitoring this closely as regulation (and deregulation) can impact stock prices rapidly. We give your portfolio managers latitude to invest in various sectors as they see fit, and we make sure those sector allocations fit within your risk profile.
5. Interest Rates: They will likely remain extremely low for the foreseeable future regardless of the election outcome.
Implications: If you own a home, consider a refinance. This could shave hundreds of dollars off your monthly mortgage payment.
Remember when your cash was earning a meaningful amount of interest at the bank? Those days are likely gone for the next few years. If you have substantial cash on the sidelines, consider an alternative such as high-quality municipal bonds which pay tax-free interest. Keep in mind these investments fluctuate in value.
Our team and our investment managers are constantly reviewing how the economy, markets, and government policies could impact your financial plan. If you’d like to discuss in further detail, we’d love to connect over the phone or via email.