Bautis Financial Advisor Commentary: November 16, 2022

This is a new installment in an ongoing series where Marc Bautis and colleagues comment on hot topics in the financial industry. This week, Kayla Waller, Financial Planner, fills us in.

Where Does Student Loan Forgiveness Stand?

President Biden’s student debt forgiveness plan that would provide millions of borrowers with up to $20,000 in federal student-loan forgiveness has hit another roadblock. Last week, a federal district court in Texas issued a ruling calling the plan “unconstitutional.” Separately, the 8th Circuit Court of Appeals is continuing an existing pause on the relief.

Borrowers probably won’t be seeing their balances reduced as soon as the president had said. The Biden administration maintains its legal authority and says it’s continuing to fight for borrowers, but many questions remain as to what comes next. Many are expecting that the Supreme Court will have to get involved.

Midterm Elections’ Affect on The Markets

While we don’t know the full outcome of the U.S. midterm elections just yet, it is likely that we will see legislative gridlock for the next two years as Republicans are likely to take the House while Democrats keep the Senate. This means that there will most likely be no tax increases and that no large, progressive spending packages will gain enough votes for approval.

If Democrats retain the House, they will likely press forward with key initiatives, potentially revisiting the “Build Back Better” Plan (including expanded social spending, corporate and individual tax increases, additional clean energy investments and subsidies, and raising or eliminating the cap on state and local income tax deductions).

Predictions:

Democrats may want to increase the debt ceiling sometime before next summer.
Expect defense spending to rise because Republicans and Democrats have a shared interest in it. Both parties feel that we’re in a more dangerous world given Russia’s invasion of Ukraine and the eroding relationship between the U.S. and China.
There is going to be competition to be “tougher on China” as we head toward 2024. That may lead to political incentives aligning both sides to push new measures on export controls and restrictions.
Tax cuts for the middle class could result from a compromise deal because Biden and Democrats may not want to be seen as opposing tax relief for everyday folks. It may even involve an initial Biden veto to excise possible tax cuts for “the rich” from any GOP package.

The silver lining for investors is that the S&P has historically outperformed the market in the 12-month period after a midterm election, with an average return of 16.3%.

What’s Going On With FTX?

Sam Bankman-Fried’s cryptocurrency exchange FTX filed for Chapter 11 bankruptcy last week. It is by far the biggest bankruptcy in the US this year, affecting investors and other counter-parties around the world. FTX had previously earned the trust of more than 5 million users worldwide, trading more than $700 billion worth of crypto in 2021.

Over 130 entities tied to FTX.com, FTX US and trading firm Alameda Research Ltd. were listed in filings. The exchanges crashed because of allegations of misused funds followed by a large volume of withdrawals from concerned investors. The value of FTX’s native token took other coins down with it including Bitcoin and Ethereum. A court next will weigh in on how to handle the customers, creditors, and business partners seeking to be made whole.

Bankman-Fried was a spokesperson for this industry who could easily speak with US lawmakers about shaping its future. The cryptocurrency industry has continually struggled with convincing regulators, investors, and ordinary customers that it is trustworthy. The collapse of FTX is having wide-reaching implications throughout the crypto market.