What Does a Biden Victory Mean for Your Financial Plan?
With the long-awaited election results finally confirmed, many investors are asking themselves what to expect from the markets with a Biden-Harris administration in the White House.
After a decade-long bull run was interrupted by a global pandemic, investors are understandably seeking a return to baseline, turning to pundits to predict our best chances to do so. Unfortunately, an election taking place at the height of an unprecedented global pandemic doesn't exactly lend itself to historical comparisons. Still, there are some patterns we can look toward to understand where we are and where we might be going.
Rally Red or Booming Blue?
If you've read our whitepaper, The 2020 Election and the Star-Spangled Stock Market, you probably already know that the political party in power doesn't historically have a huge impact on market performance. Even when you account for party lines shifting across history, the truth is, presidents don't operate in a vacuum, and a few major corporations most heavily influence the markets. So, if you were thinking of pulling your funds based on party affiliation alone, evidence suggests it is a better idea to stay put and stick to your long-term plan.
A Divided Government
One piece of good news for investors is that we're likely headed for a divided government. While the final results haven't officially been determined, all indications point to a Republican-controlled Senate and a Democratic-controlled House of Representatives. As you can see in Figure 1 here, a divided government has historically produced the best market returns overall. While past performance can't guarantee future results, investors can take some comfort in the fact that this balance of power will oblige more middle-of-the-road approaches to some of the more progressive proposals from the incoming administration.
Biden's Tax Plans
Many investors are concerned about the impact that Democratic leadership will have on their tax bill more so than their portfolio performance. It's a valid concern, but a divided government will almost certainly result in more moderate tax law changes compared to the initial proposals from the Biden ticket. Many of those proposals depended on a Democratic sweep of Congress and the presidency, which is likely no longer forthcoming.
Some of the proposed changes include:
- Raising the top individual tax rate from 37% to 39.6%
- Extending the Social Security tax from earnings up to $137,700 to earnings over $400,000
- Raising the capital gains rate to 39.6% for taxpayers with annual income over $1 million
If you're concerned about how any of these shifts may affect you, now is a great time to speak to a financial professional about how you can prepare to face these changes with certain tax-advantaged vehicles. There are many tools designed to restructure your investments in a tax-efficient way while continuing to work toward your long-term objectives. With that in mind, it is likely that taxes will increase over time due to increased spending and national debt, regardless of which party is in power. Check out this podcast to hear some interesting information on the likely future direction of taxes and what you can do about it now.
Of course, we can't talk about market performance in 2020 without mention of the Coronavirus. In terms of the pandemic, we aren't out of the woods yet. The full economic impact remains to be seen, as does the new administration's approach to solving it. As with much of the pre-election volatility, it won't be easy to pinpoint which moving parts of the economic landscape are influencing the markets at any given time. One important factor to keep in mind is that the stock market and the economy aren't synonymous. While they often follow the same patterns, the stock market is comprised of large corporations— predominantly five key tech giants: Amazon, Alphabet, Apple, Microsoft, and Facebook, whose industry has been relatively safe from the economic shutdown - while unemployment, GDP, retail spaces, and small businesses have been impacted significantly. Luckily, in terms of market performance, it appears the initial Coronavirus panic has mostly subsided. However, the path forward from an economic standpoint is still unclear.
The Horse Races
Lastly, we didn't forget about those of you taking bets...
In The 2020 Election and the Star-Spangled Stock Market, we debunked many myths about politics and the stock market, predominantly the myth that one party is pro-business while the other is pro-labor. However, one relationship has held statistical significance: when the markets are up in the months preceding the election, the incumbent party is likely to be reelected. When the markets are down, the opposition is more likely to win. The historical manifestation of this relationship is shown in the chart here.
During the 2020 election, the S&P 500 was down .04% for the 3rd quarter of the year, and the opposition party was elected over the incumbent, which makes this election the 21st (out of 24) to be correctly predicted by this method.
The sage wisdom "only time will tell" can often feel anti-climactic and even frustrating when facing concerns about the future. It is, however, one of the great lessons from a year that has been a whirlwind of historic hurdles and uncharted territory for individuals and the community at large. Only time will tell if this new administration will positively or negatively impact the markets; only time will tell if we're at the end or at the height of the pandemic. But if time has told us one thing: your best bet is to stay true to your long-term strategy.
Working with a trusted professional who listens and understands your unique circumstances and objectives can help you stay the course with a plan that doesn't break at the first sign of disruption. Now is a great time to evaluate your portfolio and ensure that your long-term objectives are front-and-center of your financial plan.
Want to discuss your plan? Contact our office today for a free financial review!
The content of this article is for informational purposes only and does not represent legal, tax or investment advice. This article is not an offer to buy, sell, replace or exchange any financial product. Past performance is not indicative of future earnings or results. Actual results will vary and may be based on many factors not discussed within this article. The opininions expressed herein may not be representative of the firm providing this article.