The presidential election is around 60 days from now and several clients have asked – is this an issue they should be concerned with? My first impulse is to remember – the markets are random and there is no way to forecast what they do. WIth that in mind…a few thoughts and observations.
Foremost is that there are checks and balances in place created by our constitution. One way or another, there is a major check in place. How the Congress and Senate races turn out will dictate how much change can happen. The Senate changing hands is not clear and entirely possible. The global betting odds are that right now the President race is even odds and the Senate odds is that it is likely to become Dem powered. Clear direction is unavailable.
Let’s take a quick look at the campaign discourse for economic change. Biden has proposed a higher top rate of income taxes; doing away with step up basis when people die and higher estate tax rates. Additionally the largest part of our economy – the energy markets – would be regulated in several new or former ways.
Since 2016, the markets seem to have responded to lower taxes and less regulation because these actions positively levered economic change across both the consumer and business population. The tax law changes stimulated both the corporate and consumer sectors. It turns out that not only has every layer of the employment universe expanded, real wages (net of tax and inflation) have risen for the first time in several decades. That wage inflation is driven by reduced access to talent. That is, the market has shrunk for available workers, so paying them more is the solution to retaining and attracting them. Higher corporate tax rates impact both employment and cost of goods which impacts the mid and lower income levels and employment rates.
In studying the history of the Presidential impact notion there is no predictive data on the party of the President elect. There’s been almost exactly the same amount of Democratic and Republican Presidents elected and over time, the markets have responded in almost the exact same fashion, and that is, the markets went up and down at about the same rate no matter the party.
If Biden is elected and the Senate is Democratic the real estate sector is where the highest certainty for change exists.The Biden proposal to change capital gains tax rates by removing the step up basis at death provision in the tax reg’s would immediately stimulate significant change in the real estate markets. The way the step up in basis works is, that when our parents die we don’t pay taxes on their property, so holding appreciated real estate and stocks and bonds until they both pass is standard estate planning practice. If this advantage was removed it could be that trillions of wealth would be in motion immediately. Parents would begin planning on how to effectively transfer assets immediately to reduce exposure to the 50% max estate tax rate and the capital gains advantage would no longer serve as an incentive to hold assets until they pass. An election power change makes real estate the spot in the economy most exciting due to its size brings high impact. A happy note is that Certified Trust and Fiduciary Advisor’s like me will be in demand and charitable giving rates would accelerate higher, both attractive outcomes.
So our take is that there is no clear path to who the winner will be. It would therefore mean following the law of lifetime income success which is – have an understanding of your spending plan and how it may change going forward and allocate assets to those needs accordingly. Planning ahead is always the best approach because it delivers confidence and calm when unexpected things like pandemics or election outcomes impose change on you and your family.
Standing by to support your success.