Broker Check

The election and the stock market

October 06, 2020

Without a doubt, this is the number one question I have been receiving over the past few months:  How will the election impact my investments?  Let me be very clear before I start this blog, if you are coming here for political commentary, you have come to the wrong place.  I will be giving you some statistics/charts/information so you can have a working knowledge on how markets have performed in PAST election years.  There is a thought among many, that this year’s election is different.  It’s pretty hard not to argue that 2020 has simply been different from almost any year that I can remember in my life.  Maybe that famous investment quote “past performance does not guarantee future results” will come to bear in this election, but it never hurts to know history.

Let’s start with the good news.  Below is a chart showing the performance of the S&P 500 as well as GDP growth going back to 1947.  As you can see, regardless of Republican control, Democratic control or a divided government, the S&P has always averaged a positive return over that time and the economy has grown.  As you can also see, full Republican control has tended to provide the highest stock market return while full Democratic control has tended to provide our highest GDP growth.

While it’s not unreasonable to expect volatility come election night, or in the short term thereafter, long term investors should stick to their plan.  Keep in mind that on election night 4 years ago, once it looked like Trump was going to win, S&P futures were down as much as 4%; however, the market ended up positive the following day.  Which will bring me to my next point … the market and politics are not the same thing.

Markets do not like uncertainty.  I was on a call today with Dr. David Kelly, who is the Chief Global Strategist for JP Morgan who echoed that very sentiment.  According to Dr. Kelly, regardless of your political affiliation, if you are a simply a fan of a strong stock market, then a clean sweep of both the Presidency and Congress is what to root for.  This was not in relation to this year’s election, but simply a general thought to remember.  The reasoning for this is that with full control of the government, it’s relatively easily to predict policy.  With that type of certainty, you can gain a certain comfort level with the investments you make, or a comfort level with the names or sectors you like, based on policy.  To his point, if you reference back to the chart above, a divided government has provided the worst market return and economic growth of the 3 comparisons.

When you look at the market-predicting election results, a recession or market decline of 20% or greater in an election year has not been good news for the incumbent.  In fact, since 1952 the incumbent has never won when one of those scenarios took place.   

So let’s explore the potential result of a Biden win as I have received a number of questions around his tax policy.  Keep in mind these are only a proposal but here are 2 of Biden’s proposed tax changes.  First, the corporate tax rate would move to 28%, up from the 21% it currently sits at from the Tax Cut and Jobs Act, but down from the recent high of 35% pre-TCJA.  Second, income tax rates for those earning more than 400,000 per year would return to the pre-TCJA levels of 39.6%, up from 37%.  Side note for those of you in NJ, if you’re fortunate enough to have earned over $1 million, you have already received a higher tax rate of 10.75% on those earnings.  Congrats!...on the million plus.

Should some of these tax hikes come to fruition, then you simply adapt your plan.  As I have said to all of you when we first established our relationship, my job starts after the plan is put into place.  Why?  Because things change.  Your life changes, the President changes, tax codes change….that will never stop.  There are other things to consider with potential tax changes outside of just the stock market.  Estate planning has been much different over the past few years.  With the federal estate tax exemption sitting at over $11 million per individual for the past few years, very few people had to do in depth trust and estate planning.  That may change.  We are also potentially looking at a completely new reality for what college used to be.  What type of planning makes the most sense?  Are there potential tax benefits around college planning to offset a potential tax rate hike?  (That’s foreshadowing for an upcoming blog 😊)

The election is going to take place. We must adjust to the policies of whoever wins.  Everyone’s financial plan is unique, so I can’t make a blanket statement on what you should do if one candidate wins over the other.  If you have individual questions regarding your plan, never hesitate to reach out.  That’s what I’m here for.

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Government Control, the economy and the Stock market

Recession Chart