ELECTION UNCERTAINTY

With the election just weeks away I wanted to share some data to help us put things into perspective. I often hear about how divided we are as a nation and what the impact of a change in political parties could do to the stock markets. While I concur that our division has turned more contentious the nation has been divided at election time more often than not.

The table to the right shows the past 30 Presidential election results based on the popular vote.

As the table shows, the winner has enjoyed more than 55% of the popular vote only nine times, so it is not uncommon for the winner to have only a little more than half of the voters’ support. In addition, over the past 30 elections, on ten occasions the winner has 50% or less of the popular vote.

Presidential election results have had varying short-term impacts on the U.S. stock market. The following chart shows the U.S. total market return for the three month and six month periods after the election for the past 23 Presidential election cycles. As the chart shows, both the three month and six month average changes have been positive. It also shows that the change has been better after a Democratic President has been elected. It is noteworthy that since the Reagan election of 1980 the stock market has been positive six months after the election in eight of the past ten elections.

Looking over the past forty years, we see the Presidential impact on the U.S. economy as a whole, as measured by GDP and on the U.S. stock market, as measured by the S&P 500.

While issues are always different from election cycle to election cycle, one of the factors that effects the stock market is the candidates’ tax policy. We have seen the economic impact of the Trump tax cuts, but let’s look at Joe Biden’s tax proposals. While these are his proposals, we must remember that it will take a change of party in BOTH the White House and the Senate to get new tax legislation. It is my opinion that it will be next to impossible to get the Biden tax plan passed in a Republican controlled Senate.

Joe Biden’s proposed tax plan consists of the following:
• Repeal the Trump 2018 tax cuts – raises top tax rate to 39.6%
• Tax Long Term Capital Gains as ordinary income for income in excess of $1 million
• Cap the tax benefit of itemized deductions at the 28% tax rate
• Impose a 12.4% Social Security tax on earned income over $400,000
• Expand the child tax credit
• Expand tax credits to cover health insurance premiums
• Expand child care tax credits
• Create tax credits for first time home buyers
• Change deductibility of retirement plan contributions and replace with tax credits
• Raise the corporate tax rate from 21% to 28%
• Imposes a 15% minimum corporate tax rate on book income
• The repeal of the Trump tax cuts reverts the estate tax exclusion to pre 2018 levels (approximately $5.75 million)
• Eliminate the step up in basis for assets upon death

If we look at income tax planning opportunities available in 2020 under a Democratic sweep of the White House and the Senate, you may want to consider:
• Accelerating income into 2020 for higher income filers
• Evaluating deductions for timing between 2020 and 2021 for higher income filers
• Consider Roth conversions in 2020 for IRA assets for higher income filers
• Consider taking long term capital gains in 2020 for higher income filers
Estate planning is another major planning opportunity if the Democrats take the White House and the Senate. The reduction of the estate tax exclusion can have large implications for higher net worth families. We will be happy to discuss the planning opportunities available to you given your specific circumstances.

Uncertainty can be a cause of concern, but given all of the uncertainties in 2020 the markets have held up pretty well. The chart below shows the monthly change in the S&P 500 (price only) during 2020. After the big drop through March 23 (-30.75%) due to the COVID-19 shutdowns, the market has come back 55.71% and is up 7.83% as of October 16, 2020.

At JVL, we continually say that we are planners not predictors. We may not know the outcome of the election, but once we do, we can plan for the impact on your financial situation. If you would like to talk further, please feel free to contact one of us. We appreciate the trust our clients place in us to walk them through the uncertainties in life. If you know of someone who could benefit from our services, please let us know.

By: Jerry VanderLugt CPA, CFP®, CVA

[1] Information obtained from https://www.britannica.com/topic/United-States-Presidential-Election-Results [2] Information obtained from Avantis Investors Presentation: Will the U.S. Election Affect Stock Market Returns. Source: Ken French’s Data Library. https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html [3] Information obtained from Hartford Funds Client Conversations: The Next President Is Unlikely to Sink the Economy or the Stock Market Source: World Bank via FactSet, Morningstar, and Hartford Funds. [4] Information obtained from Morningstar Direct: S&P 500 Price Return