2020 election

Election scenario planning plays a role in macroeconomic analysis and financial planning, particularly in recent years as tax policies have changed and governments have increasingly intervened in the financial markets during times of crisis.

We focus primarily on a few of the market and economic impacts of the election. But our evaluation is not a voting recommendation. There is always more at stake in elections than simply markets. Here’s a brief look at some of the candidate’s policies and how they may impact your financial life.

The economy

No matter who is elected this year, the economy will still be recovering from a deep recession. Both fiscal policy (federal taxes and spending) and monetary policy (Federal Reserve) are likely to be important to economic growth.

Large deficit spending will almost certainly continue regardless of which party is in power. Trillions of dollars in fiscal spending have been a major factor that’s kept the economy from getting worse. If the economy is not gaining significant traction, we’ll likely get more fiscal support.

Regardless of the election, interest rates are likely to stay low for a long time because the Federal Reserve controls interest rate policy. When rates are low it is easier for companies to borrow and expand, which may help boost the economy. In addition, equity markets may continue benefiting from a low interest rate environment.

Trade

The primary market risk from a Trump reelection likely comes from an escalation of the trade dispute with China. The Trump administration will likely continue to be tough on China and our other primary trading partners. Even with a divided Congress, this is an area where the President has a lot of power to implement policy changes.

While Biden would be more likely to build multilateral coalitions to try to influence China, U.S.-China trade tensions wouldn’t likely disappear under a Biden administration. Under a Biden administration tariffs on goods from non-China trading partners would likely be reduced and may provide a modest offset to any corporate tax increases.

Regardless of who wins the election, there is growing bipartisan consensus that a tense U.S.-China relationship is a long-term reality that will shape trade and foreign policy decisions for many years to come. One area of broad agreement is the need for greater protections for intellectual property and to bring back key links in the industrial supply chain or at least diversify out of China.

Business Taxes

Taxation is one of the biggest sources of disagreement, with Democrats proposing higher taxes for corporations and wealthy individuals, and Republicans arguing for deeper tax cuts.

With the passage of the Tax Cuts and Jobs Act of 2017, the Trump administration lowered the corporate tax rate, small business tax rates, and rates for individual taxpayers, which had a positive impact on consumer spending and corporate profits. We generally would expect more of the same in a potential second term for Trump.

Prior to the Tax Cuts and Jobs Act, the corporate tax rate was 35% and it currently sits at 21%. Biden has proposed increasing corporate tax rates from 21% to 28%. Biden has also proposed other tax provisions that potentially could impact businesses’ bottom lines, such as imposing a minimum corporate income tax and doubling the tax on global intangible low tax income from 10.5% to 21%[1].

Increases in corporate tax rates would be a hit to earnings, which are a significant driver of stock prices (though not the only one). However, historically, rising corporate and individual tax rates have not meant falling stock prices. In the 13 previous instances of tax increases since 1950, the S&P 500 has shown higher average returns, and higher odds of an advance than in decreasing tax environments, according to research from Fidelity[2].

Personal Taxes

Under a second term for President Trump, we expect a continuation of current tax rates. By contrast, Biden has proposed a number of policies that would raise taxes on individuals with income above $400,000. These include increasing the top tax rate to 39.6% from 37% and treating capital gains and dividends, now taxed at a top rate of 20%, as ordinary income on income above $1 million[3].

In addition to higher federal tax rates on income and investment gains, the Biden campaign has talked about eliminating the “step-up in basis” rule, which currently reduces the tax burden on heirs who inherit assets from a deceased person.

Health care

Trump is opposed to the Affordable Care Act, the health care system put in place under the Obama administration. The Trump administration has brought a lawsuit against it all the way to the Supreme Court. Meanwhile, Biden has talked about enhancing the Affordable Care Act.

So far, however, the details of future plans are faint. So, we will need to wait and see how those plans take shape.

Summary

The causes of this year’s election uncertainty may be unique due to the pandemic and the highly divided political environment but we’ve been through many elections before. We encourage you to stay focused on what you can control. We have a plan in place no matter what life, elections, and markets may throw at you. If you want to review or update your plan, please reach out.

If you want more economic and market data for nearly 100 years of U.S. Presidents, you can view an in-depth interactive chart here. https://www.dimensional.com/us-en/insights/how-much-impact-does-the-president-have-on-stocks

[1] Taxfoundation.org

[2] Fidelity Viewpoints, 8/31/20. Fidelity analyzed stock market performance in the calendar year when there were increases in in federal personal, corporate, and capital gains taxes, plus the year prior and the year after.

[3] Taxfoundation.org

IMPORTANT DISCLOSURES:

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website(www.adviserinfo.sec.gov).Thisis provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.To determine which investments may be appropriate for you, consult your financial advisor.