As we approach Election Day, pundits on all sides stress the outsized importance of this particular election. While we face confounding economic conditions and widespread uncertainty, it’s natural to wonder what the future could hold for the markets and tax policy and what, if any, changes you should consider in response to the outcome of the election.
Your Vote Matters, Just Probably Not to the Markets
While there are potentially significant societal impacts awaiting us as a result of the outcome of the election, it is unlikely there will be any appreciable long-term market change attributable to who is sworn in as president on January 20, 2021. Historically, market performance has been indifferent to party politics, and as of now, there is little reason to expect otherwise over the next four years.
S&P 500 Performance and Presidential Party
In the near term, however, there may be some market volatility as a result of the uncertainty leading up to the election and potentially into a new administration. Uncertainty regarding political party leadership tends to create noise during election season, but which party gets elected has proven to be an inconsequential signal for market performance. This same sentiment holds for the makeup of Congress and whether we have a divided federal government or one party in control of both the White House and Congress.
S&P 500 Performance and Congressional makeup
Fundamentally, historical data shows that markets are nonpartisan and without the social and moral concerns with which the humans invested in them are burdened.
Markets and Taxes
Based on the stated plans of the two candidates, the election will almost assuredly influence tax policy. In the event of a Trump win, existing tax cuts this administration has put in place will likely be extended and potentially expanded. If Biden wins, indications are that we will see an increase in corporate taxes and individual taxes among the highest earners. While these policies may have an impact on you individually, much like the election results more generally, the long-term effect on the markets has historically proven to be modest regardless of the election outcome.
That said, in the shorter term, we may see increased volatility as the markets attempt to account for the effects of any policy changes. Changes in tax rates have historically had a shorter-term impact on market performance as investors reassess expectations of future after-tax earnings and their own investment choices. For example, recent analysis by Goldman Sachs estimated that an increase in the corporate tax rate from 21% to 28% could reduce corporate earnings by 12%. However, it’s worth noting that even that level of tax increase would leave us in a relatively business-friendly tax environment, relative to the 35% tax rate prevalent beginning in the 1990s up until 2017.
Over the long-term, tax changes prove to be just one of many factors that drive market performance. Accordingly, an increase in taxes by itself is not necessarily a negative depending on the other policy choices being made in concert. The potential reduction in savings and investments resulting from higher taxes may be offset by the potential benefits of reducing deficits, improving social welfare and reducing income inequality. For example, on a purely economic level, increasing taxes to provide more generous social safety net benefits could result in more money flowing through the economy due to those in the lower income brackets spending more rather than limiting or delaying purchases.
Under a Biden Presidency, other policy changes such as an improvement in trade relationships, a reduction or elimination of tariffs and significant infrastructure stimulus could bolster markets and offset the impact of higher corporate taxes. JPMorgan estimates indicate that trade tensions and resulting tariffs reduced corporate earnings by 7-8% in 2019, so you can see how the economic differences between a Trump presidency and a Biden presidency could turn out to be negligible. While the differences between a lower tax, more protectionist approach and a higher tax, more trade-friendly approach may be significant in terms of the details, taken altogether, the market impacts may prove to be more modest over the long-term than feared.
Tax Policy: Planning Over Performance
Given that election results and tax policies have historically shown little long-term influence on the markets, we believe it wise to focus on specific policies and the potential impact on wealth and estate plans rather than the risks to market performance. Current polling data shows Biden slightly ahead, so if we imagine for a moment that it’s late November of 2020, with Biden set to be sworn in in January, what changes might you expect? Based on Biden’s proposed policies, individual income taxes for top earners would increase and estate taxes would increase while gifting exemptions would decrease.
Each Candidate’s Primary Tax Proposals
These changes could have a significant impact on some individuals, and there is a range of estate planning and tax strategies that may be worth considering depending on your specific situation. It’s a good time to check in with your advisors, including your CPA, estate planning attorney and your Wetherby team to see what you may want to consider in the months and years ahead.
Regardless of the outcome of the upcoming election, the likelihood is that the markets will continue to behave as they would have. Your long-term investment plan and the ongoing work of monitoring your portfolio is designed to account for variations over time. Your energy is better served focusing on your personal wealth, tax and estate planning concerns, and your Wetherby team is here to answer any questions you may have along the way.