Episode 56: How Will the Election Impact Your Portfolio?
2020 has certainly been a whirlwind of a year…between a national pandemic, a possible vaccine, and the beginning of school, this fall brings a presidential election.
On today’s show, Marc and John discuss the different possible outcomes of the election and how each one can affect your portfolio.
In this episode, you will learn:
- What consequences do taxes face based on the outcome of the election?
- Will Social Security be altered?
- Where does the election fit in when considering risk?
- What you should do with your investment strategy
- And more!
I know we’ve got a lot of things going on in the world today- that’s the understatement of the century. We’ve got the pandemic, whether there’s going to be a vaccine and a second wave of cases.
Now that we’re into the fall, what’s the economic recovery going to look like? Is it stalling? Is it picking back up?
We’ve got kids going back to school, which I know is an event among itself. And, there are a lot of opinions floating around too.
So I think that the opinions that we’ve seen a lot recently have been around the election. We wanted to do an episode about that. And while obviously we don’t know what’s going to happen with the election, we’ll look at it from different sides. We’ll see depending upon what happens, different scenarios, how the market’s economy could be impacted by it.
I think this is a great topic. Actually, I’m kind of nervous about it because it’s just so charged right now; it’s everywhere you look. I mean, I was saying to my wife other night, you’re sitting there watching TV and you work really hard to try and find a channel just to get away from the craziness. We were also saying: man, it’d be nice if we could just fast forward and get this election over because it’s just so intense.
And putting this together, I was kind of nervous because you want to stay in the middle as much as possible. And, being in the middle, sometimes it’s dangerous. But, obviously we’re here to give you some information.
So don’t come at us, don’t hold us to it, if you don’t like what you hear. It’s funny because we talked to a lot of people and you see both extreme sides of it where someone who has political beliefs on one side says we’re doomed if this candidate gets elected and you see the complete opposite on the other side.
So yeah, you’re right. It is so politically charged right now that emotions are high. And like you said, we want to try and take this nonpartisan approach to this show and just kind of put out there: this is what the facts are, and this is what the impact is.
And with that being said, there’s still uncertainty around the election. So we don’t know exactly what’s going to happen. Right now, especially, it’s as tight as can be; anything can happen.
How Have Elections Affected Markets in the Past?
I think that one of the messages we want to get out is that we’ll look at it historically and what has happened under different presidents. I think the belief is that whether it’s liberals or conservatives or Republicans or Democrats, this happens.
And if you look back at it historically, there’s really not a pattern to being able to put a blanket message and saying under one or the other, the markets rise more than they do under the other ones.
So I think that’s one important message to get out there. I think part of it is because over time, markets go up and they go up whether there’s a Republican or Democrat as the President.
Just think about it. When President Obama got elected, people went out and they bought stuff, they went to restaurants, they ate, they spent money. When President Trump got elected, people did the same thing. So, people are going to go about their lives and spend money. And that’s a lot of what the market reacts to; that spending, that consumption, that GDP growth that we see.
Once I started doing some of this research, I was actually kind of surprised at some of the data and how it really presented itself in a way where I thought I would’ve seen way more of a dramatic influence, especially in those times where you can see how somebody might feel a certain way.
Even back in older elections in the past where you might say: oh, I can imagine how the market might’ve been thinking this. And then when it actually hit and the election went in a certain direction, it didn’t quite pan out the way it might have.
I think that was really the main takeaway I had from the research that I did as far as the markets and the Dow Jones and how they reacted: they were actually way more modest than I just in general then I thought they would be for sure.
And when you were doing the research, did you see what president has had the highest S&P 500 growth over their term?
So I’m actually working off of the Dow Jones, if we can assume that they’re gonna be pretty close in a lot of these cases. Crazy enough, the biggest bump was not the day after a presidential election; it was actually after a midterm in 1980. They saw a 4.25% increase. That was the biggest Dow Jones Industrial Average bump that we saw from an election. And it was actually just with a midterm.
I mean, I was pretty young. I knew there was something special going on with the Reagan years and everything that was going on. I didn’t quite understand it, but that was a big swing when the Democrats over control.
Reagan is up there, but it’s actually under Bill Clinton that the S&P 500 was up 210% over his eight years that he was in office.
So this number is just the next day. It was like the initial, which is kind of obviously just a separate way of looking at it. But yeah, that makes a lot of sense. Bill Clinton was a unique Democrat. He definitely had a unique presidency with the bubble and everything that was going on there too.
I think even as you were talking about that one-day reaction to an election, I’ve never seen anything like in 2016 when Trump got elected.
I’m sitting there watching the election at night and we’re seeing where it looks like, okay, Trump is going to win. All of a sudden, I started getting calls from people at 8 o’clock at night saying that the future is on the Dow and the S&P are dropping. People are calling me saying: we have to get out of the market tomorrow; we have to sell everything.
And then, all of a sudden it was like a complete reversal: tomorrow comes, and there was a big bump in the market. So, you know, we’re obviously looking at a one-day, which anything can happen one day, whether it’s election-related or anything related. But it also tells again how emotional these things are with people and investing.
Yeah. I tried to look up a similar situation (not necessarily from the market itself) but the idea of surprise that was right. I mean, there wasn’t an analyst or a poll out there that said that was going to happen, or there were some people who predicted it, but you were considered crazy.
It was an interesting way to kind of see how the market has these things kind of built into them already, like the values that they’re built in and the prices are built on what you expect to happen.
And this is one of those really unique cases where literally within minutes, you found out that what you thought was going to happen wasn’t. So it wasn’t necessarily that they thought Trump was going to be a bad president for the market. They were just so shocked that they said: all right, I don’t know what’s going on. Let’s just get out.
Well, that is part of it with the markets and not just political elections, but it’s uncertainty. No one likes uncertainty in their lives. The markets hate uncertainty too.
We’re tying it here to an election, but it could be about anything. That uncertainty brings that anxious feeling. But, you can look at it as the markets are treated, just like a person does. And they don’t like uncertainty either.
The people who did let the emotions get to them missed out on a nice bump. And I think that the real true takeaway is that from this, and probably us looking at this election, something similar could happen.
But I think in the end, the theme is going to be that if you get too emotional about some of these swings and some of these things that happen, you might miss out on an opportunity as well.
Yeah, definitely. To finalize this section about talking about how the market’s done under different presidents, I found a pretty cool fidelity study that showed some stats around different scenarios and what the growth of the S&P was depending upon what happened.
I’ll read those out pretty quickly (again, I’m using the S& P 500 as the index or the benchmark):
- Republican sweep (Republicans control the President and the Senate) = up 48%
- Democratic sweep (Democrats control the President and the Senate) = up 41%
- Democrat divided (Democrats control the President and Republicans control the Senate) = up 45%
- Republican divided (Republicans control the President and Democrats control the Senate) = up 38%
So as you can see, they’re not that different.
If you have long-term money, there’s really no reason to not just stick it out and stay in there. And a lot of those numbers could have come from a day where you would have been out of the market and you could have missed out a decent amount, if you look at the timing of this situation.
I think that the day after it is a similar type of a situation where it’s not as indicative of maybe some of the stats you have. But, I think a lot of people are focusing on that day as to like: I’m going to wait and see what happens and then buy in if it’s going up or kind of looking at it in that way.
For a Republican, the average gains the day after the election is 0.64. I think that the Democrats actually do have an average of about a percent down.
If you do see, even that one day to get so worked up over averages like that in numbers. I think the highest of being down was Obama, but I think he saw almost a 4% increase the day-of.
So there’s all these different things where if you sat and waited to see what happened the day after Obama got elected, you missed out on a 4% increase on the day of his election. Obama’s election was a pretty tough time; obviously 2008 when the market was just right.
Everyone’s emotionally charged right now, making long-term and short-term investment decisions based on emotions. It’s probably the worst thing that someone can do.
So we’ll talk a little bit about that more later in the podcast. What I want to do now is just talk a little bit about the two different candidates that are running for election.
Trump’s been in there for years, ( I guess we don’t know, we know he could, if he gets re-elected) but we sort of know what his thoughts are and things that would impact the markets and economies. Biden has come out with some of his proposals.
Possible Impact from This Year’s Election
Let’s talk a little bit about that and what we can see impact economies, markets, and portfolios. So we’ll look at four scenarios that could happen with this election.
Obviously there’s a lot of stuff going on outside the election that could impact the economy and investments, but let’s just for now focus on what we can expect from that.
A lot of the stats that we’ll use for talking about the scenario of the democratic sweep, which is Biden winning the presidency and Democrats overtaking the Senate house; that gives Biden’s proposals the greatest chance of actually passing through.
So again, like you said, trying to find a nonpartisan source of information is not that easy on any of this stuff. One that I’ve pulled my information from is taxfoundation.org, which is supposedly the most unbiased nonpartisan source out there
What could we see terms of specifics, if Biden does get elected?
I think the good thing about the policies is that they kind of are what they are. I mean, depending on, unless he changed his mind. Sometimes it’s hard to see where people are swaying, but Biden put out his proposals and they are out there.
I think that the biggest takeaway is that they’re really not as bad as maybe sometimes the ads make them. You see these ads and Biden’s going to raise taxes and it’s the end of the world and run for cover. And when you really dig into them, sure there are some changes there that could affect certain industries. But, I was actually kind of surprised; they weren’t really as aggressive as I thought I might be.
A couple of them that stuck out:
- Raising taxes
One of them is that he’s going to raise the top marginal tax rate bracket. So right now, it’s up at 37%. He said he would raise it back to where it was at 39.6%. So we may see some of the repeal of the tax cuts and Jobs Act of 2017.
The big one is that he said he would raise the corporate tax rate. Right now, it was lowered down to 21%. I think he’s proposed raising it to 28%.
So I actually saw 25% as well. I did see both, actually. I think it’s smart. He’ll say: look, I’m just going to go back to the way it was before 2017 and everything was great then. So, don’t worry about it. And I think he’s been kind of taking that approach.
Let’s be honest, corporations are going to look at that and people are going to be looking at it as taxes where it’s not going back into the company. That could obviously have an effect.
But, taxes go up and have gone up and down throughout our history all the time. And I think if we did enough research, we would find that when they did go back up, especially at 2%/3%/4%/5%, maybe you saw a little bit of a reaction.
Then the other part of it too is if we expect Biden to, and it’s looking like he might, it’s probably going to be built in any way.
Right. I mean, that’s the other thing that people don’t realize about the markets; they will build in any expected changes.
The markets do take unexpected activities hard because they build in what they’re expecting into it. I see this all the time. Diverting a little bit from the political talk…someone may look at a company and, and their earnings are great, right? You look at their earnings and their revenue and it was up 25% from last year. And you’re like: this is a great company. It’s really growing at a great pace. And all of a sudden they announced that their revenues were up 25%, but the stock drops after they announced that earnings. And the reason is because let’s say the market was expecting 28%, it’s already priced in that it was going to grow 25%.
It was priced in that it was going to grow at 28%. And when it grew at “only” 25%, the market looked at it as a disappointment, even though 99% of the companies out there would take growth year over year at 25%. For this particular company, it was expected to grow at 28%.
- Eliminating the Step-Up In Basis
The way this one works is: let’s say someone bought a house for $100,000 years ago.
And let’s say that house appreciated to, let’s just say $1,000,000 as an example. And, they die in that house. What a step-up in basis means is that whoever inherits that house, it now shows that they basically acquired it at a basis of $1,000,000 dollars.
Whereas, if the person sold the house right before they died, they’d have to pay capital gains tax on $900,000; that $1,000,000 that they sold it at minus the $100,000 that they acquired it for.
Biden is proposing to eliminate that step-up in basis. And again, it’s just more money coming into the government.
Yeah. It’s a nice, quiet way to tax the transfer of wealth and that’s his theme, right? Obviously he’s going after the wealthy. That’s the way he’s going to present a lot of this stuff.
- Capital gains tax increasing to ordinary income tax rates for someone that earns more than a million dollars.
So to, to kind of summarize that one a little bit: we talked about ordinary income rates going up to a top bracket of 39.6%. If we look at it now, let’s say someone that earns $1,000,000 and they sell some asset where there’s a capital game, they would pay tax.
The highest tax bracket for capital gains is 20%. Plus there’s a 3.6% Medicare that gets a stark surcharge. So we’re under 24% for the total; that’s the most they would pay.
If this proposal goes through, they would pay tax at a 39.6% rate. So that is for people earning. And we’re even seeing that in New Jersey as well, because the governor of New Jersey just passed a millionaire tax, where if you earn over $1,000,000 a year and live in New Jersey, your tax bracket is increased a little over 2%. So we’re definitely seeing that theme play out a lot where the more you earn, the more that taxes are going to go up in that case.
Did you see something where they were saying that there was a tax rule that they were looking at where you would pay tax, regardless of whether you sold or realized the gain? Did you see anything like that?
No, I didn’t see anything. I though
I thought they were looking at something where if the asset did grow, regardless of whether you sold it, you’d have to realize the gain in every year. So you’re just not sitting on these assets. I was curious, so I wanted to chat about that.
That’s something different because as it is now, all these assets have two different classifications: either you have an unrealized gain or loss, or you realize the gain or loss, and then the tax impact is in the year that you realize the gain or loss. If it’s unrealized, there’s no tax. And that’s where that step-up in basis comes in because someone can be sitting on this enormous unrealized gain and never have to realize it and as a merit to it, pass it on to a beneficiary.
So, yeah, there are definitely some differences with his proposal. With what we’re talking about, the scenario where Biden becomes president and Democrats take over the Senate will be a lot easier to get a lot of these changes through, but we’ve seen in the past when it’s mixed (in those other scenarios where either Biden becomes President and the Republicans maintain the Senate or vice versa- Trump becomes President and loses the Senate.
We see that gridlock where the status quo happens. I guess recently, we’ve seen presidents rule by executive order, which there’s always that chance that happens either way, whether Trump or Biden becomes president.
I think the other scenario is if Trump wins and Republicans maintain the Senate. I think there’s going to be a couple of themes either way. I think just if you even look at this year, there’s been a lot of spending and at some point that bill is going to come due.
And then we may, as a country, just keep kicking it down the road. But the current tax brackets are set to expire in 2026. I think taxes are only going to go up over time just because the government needs money to pay for all this stuff that they’re spending on.
Yeah. And the level of the level of debt and the philosophy and the thoughts on that is; there’s a lot of difference, almost like a whole other episode to talk about how the debt affects the macro economics.
There’s a lot of people who even think that the amount of debt that we have right now, just as an example, isn’t necessarily a bad thing. We always hear about this spending. I mean, from where I sit, it just seems like obviously at some point we’re going to have to start paying some of it back, you know?
That’s a whole other opinion and whole other area that really kind of muddies the waters as well. But to Trump, he’s different in that sense, right? Because he’s a conservative and he did actually kind of run on the idea that Obama was spending too much.
We’ve actually continued to see the actual debt go up, which is always interesting to see. But, does anything else jump out at you as far as about what Biden has planned?
- Social Security
We’ve done different seminars and webinars on social security. One of the things we talk about is the trust fund and will the trust fund end? There’s that analysis that comes out every year on the social security trust fund. And then we talk a little bit about the different scenarios or different changes that could be made to prolong it.
And one of the things that Biden is putting in his proposal is to eliminate the income cap on social security taxes and what that is.
So if you earn over a certain amount, what I think is $137,000, you stop paying into social security at that amount.
So if you earn $400,000, you’re only paying a hundred, no taxes up to 137,000. And you know, that’s one of the different scenarios that have been talked about on how to extend social security benefits.
The other one is increasing the age that someone can start taking benefits. At some point where this income limit cap is eliminated, I’ve always thought this is probably going to be the one that goes first, because it’s an easy one for people to look at and pick on it.
Yeah. I’m surprised it hasn’t either already, because at a certain point, some people are higher earners. Is it right around like August or September? They see a slight bump in their paycheck cause they max it out. Or I guess it depends on how much money you’re making, but yeah.
The social security trust fund being depleted is nothing new. Here’s one of the few times where we’ve seen someone actually try. I think both sides of the political parties have at least breached the subject, but it’s never really gone anywhere. If Biden does become president, I don’t know if there will be some traction with this.
Now I digress where there’s always that issue with the employment tax with Trump; whether or not he’s going to have to forgive that payroll tax.
It’s a crazy one because going back to what I said about how presidents are tending to rule by executive order, this was an example of it where he just put this.
Usually Congress has to approve such a change to payroll taxes. He just put a deferment being able to defer on both the employer and employee side. And I don’t know, we almost looked like it was part of like his campaign.
He’s not a dummy. Whether you love him or hate him, it’s clearly what he was doing.
What happens if he does get elected and it’s forgiven? What happens if he’s elected, it’s not forgiven? What happens if Biden’s elected?
So that’s one of those examples of that payroll tax, which is part of the stimulus package. He said you don’t have to pay. But, that’s what he was for. He was deferring FICA tax, that self employment tax that helps go into the social security trust fund. That’s another thing that we’ll see how that plays out.
What Should You Do To Your Investment Strategy?
We’ve covered what we could see as changes. We’ve looked a little bit historically about this. But, the last thing I wanted to cover is: should you change investment strategies?
I mean, I think our message should be pretty clear. The answer is no.
But, it’s not as simple as that.
The way we handle it on our side is we put together an investment strategy customized for what someone’s trying to do, and what you’re trying to do financially might be different than what I’m trying to do. It might be different than what someone else’s is trying to do.
We’re believers in risk and how important risk is to one understanding it. Having it transparent, the risks that you’re taking with your investments, but it’s not just risk for the sake of investing it. The risks should be relevant to what you’re trying to get out of those investments. I think that’s more of where we’re trying to go with investment strategy.
Sure. And the timeline is a big part of it too. Right?
If someone comes to us and says: hey, I’m looking to buy a house in three or four months, we’re obviously going to look at that very, very differently than we would for somebody who’s retiring in 20 years.
I think part of it too, is that a lot of people don’t understand how much risk they have in their portfolios. And we’ve seen it on both sides. We’ve seen people that have way too much risk and we see people that don’t have don’t have enough risk.
A lot of times we look at the stereotypical retirement and say, alright, what do we have to do to make sure your money doesn’t run out? And if we look at it at that high level of a question, some people need different amounts of risks.
They didn’t need different amounts of growth. They need different amounts of income from their investments to generate. I think we’d all, I mean, tell me if I’m wrong, love to:
- not have any risk
- keep our money under the mattress
- have enough that we can handle inflation taxes, healthcare expenses in retirement,
- not have to worry about the market volatility
But for, for most of us, that’s not really an option.
Obviously, on top of this, we’re in the middle of a pandemic. That’s obviously presented risk as well.
And then when we look at this presidential election, if there is risk involved there or how that’s going to affect portfolios, I would probably argue that that the presidential election is, is actually kind of far down on the list of risks, if you’re going to even call it a risk.
I think there’s way more. That’s part of it, but also before these, we were talking about how much we would have missed out on, if we let emotions get the best of us back in March.
And that’s really to show that there isn’t necessarily correlation between the markets and between what’s going on in the world, what’s going on in the economy. You look at what’s happened with the pandemic right?
Towards the end of February, we started seeing the market drop and you know, it hit its bottom. It wound up in its spot on March 23rd. That was the lowest that the market was. But if you look at it at that time, people were still saying, get me out of this. We were still hearing the news headlines of how bad the virus was, hospitals are overrun and there was no one at that bottom that was able to say, okay, it’s time for me to go back into the market and time for me to fully invest.
And what did we say after that? The market took a rapid ascension up from that bottom. And there are people still now that insist on taking their money out, haven’t put their money back in and you know, they’re looking at 15%/20% drops and that’s real money.
That’s gone; not unrealized gains or unrealized losses that we’re talking about, you know, trying to time the market. This year is just another example of (trying to hammer that message home), that timing the markets is not just difficult, it’s basically impossible to do because there isn’t a direct correlation between the markets and the economy.
That doesn’t mean we’re not going to see another drop because of what happens in the future with the virus. Iit may drop, but trying to time those activities, just like trying to time an election, what the market is going to react to an election it’s, it’s impossible.
We don’t know. So that’s why we stress the importance of the discipline and having a strategy. Don’t be a short-term market timer and sticking out; sticking in for the long term.
It almost seems like your bigger risk is not being in the market and missing out on the growth.
And people don’t think about it like that. They were like: oh, I feel so worried. It’s going to go down. Well really in a lot of cases, they should be worried about not being in the market and missing out on the upswings.
I was just looking at that chart recently, I forget the exact number, but it’s like an astounding amount where, if you’ve missed the two or three best days of the market in a year, it’s like a 12% swing where it’s crazy.
That’s where the saying comes: It’s not timing the market, it’s time in the market, which will predict how successful you are as an investor or not.
And again, kind of wrapping it up. It comes back to those emotions. Politics is can’t get much more emotional right now than what’s going on in the political spectrum.
So we try to help people separate it. Anyone can get as fired up about their side of politics as they want. Just keep it separate from investing strategy and from long-term financial planning is how we try and approach it.
Yeah. I wondered if it was like this back in like the years when I was a kid. Obviously social media wasn’t a thing, but man, there’s some dirty play going on between. I mean, Twitter is just like, is a wasteland. There’s just so much slinging going on back and forth. And like I was saying, it’s best to just maybe sometimes just turn off the TV and stick with your strategy.
It’s like you said, we’re getting hit with a fire. You know, everyone gets hit with a fire hose of information that all is coming from a place where there’s an agenda behind it.
Who knows what’s true. What’s not true. And you know, trying to kind of process all that information. It’s, it’s tough. My strategy is to kind of ignore, you know, northern noise and, you know, especially on the financial side of it and then really just focus on: alright, this is what we have to do for this particular person to meet this particular goal or, what they’re trying to do and try and just eliminate that noise that’s out there on the different topics about it.
I think we nailed it. I think we’re doing pretty good there. And is there anywhere where people can go to reach us?
I’m a big believer and always trying to improve what you’re doing, in anything, not just finances.
We’re happy to take a look. If someone has a particular question whether it’s about the election or about anything financial related, we’re happy to talk to them.
Yeah, for sure. I would hope that if you do have concerns, don’t feel like you can’t reach out to somebody. Obviously we’d love it if it was us, but just if you have money sitting somewhere and you’re unsure about it, reach out to somebody.
Like I said, we’d be happy to answer any questions, but don’t let it go.
That brings us to the end here. Any ideas as to what we have on the horizon?
Kind of along this line of emotions getting involved in investments. I think we wanted to go specifically into that topic; not just seeing ourselves, but also what’s out there, you know, people making investment decisions.
Sometimes they’re bad, sometimes they’re good. And we’ll kind of wade through how the emotions come into play. You know what I think we all look at it, or at least I look at it a lot as: alright, we’re going to do this analysis. We’re looking at the numbers. You don’t realize how much emotions come into play when someone makes an investment decision.
So we’ll over some examples of how emotions come into play and really look at how someone can make optimized decisions around their investments.