The 2020 Presidential election is heading towards us quickly, and concerns about the pandemic and the economy mean that the election probably has not received as much attention as it would have otherwise. Some of my clients have started to ask about potential market impact from the presidential election and changes to tax policy and corporate earnings, and what this might mean for our portfolios specifically.
I think that any good financial plan incorporates an assumption that taxes will rise in the future, if only because taxes are historically low now, and because we are incurring government debt at an alarming rate. That expectation is already built into your portfolio as it is built into market prices. However, former Vice President Biden is not Bernie Sanders or Elizabeth Warren; his policy proposals are meaningfully less radical and potentially costly (in terms of negative impact to GDP and employment) than theirs would have been according to analysis from the Tax Foundation1.
For example: in 2017, President Trump oversaw a reduction in the corporate income tax rate from 35% to 21%, a 14% decrease. If Mr Biden wins and manages to do what he says he will do, this rate would increase to 28%, only half of the way back to Obama-era levels and about half of what the corporate rate was under Ronald Reagan. The daily overload of vitriol and manufactured outrage we witness from the political media disguises the reality that Mr Biden and Mr Trump are both relatively moderate in terms of economic policy.
Because presidential elections are such significant events, there is a very common tendency for us to draw a direct causal line between the election and what may occur after the election. In reality, that link is very difficult to make. Consider this chart2, which is taken from our presentation called "Market Returns During Election Years":
2Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect
costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Here, I am relying on the S&P500 as a substitute for "the market", although we know that it is not a good representation of a diversified portfolio. What you can see in this chart is that there is no pattern between annualized market returns and the party or policies of the occupant of the White House. We also find that that there is no discernable pattern...
- In market returns overseas as a result of the US presidential election
- In fixed income
- Between first and second terms of Presidents.
- In market returns as a result of party in control of Congress.
The evidence leads us to conclude that neither party in power nor policy have predictive potential in portfolio planning. This is not to suggest that the President of the United States has no influence on market behavior. Such a suggestion would be wrong. Rather, that the President is one of an enormous number of variables that influence market prices along with other Presidents and Prime Ministers, what companies are doing, global pandemics,
technological breakthroughs, natural resource supply and demand, etc. Because there are so many factors in play every day, it is really challenging to determine what is going to happen based on who may be the next President.
With that said, here is another way of expressing the same data3
As Presidents and their policies have changed over time, capital markets have provided significant long-term returns. The reward for bearing with the short-term uncertainty of things like elections (and pandemics, and protests, and...) is the opportunity for investors like us to capture those returns, regardless of who is in the White House.
On top of the pandemic and everything else in the news cycle, we are now headed into peak "noise" season for the election, and how the election impacts investing may be at the top of mind for people in your circles as well. I wanted to provide you with some of our thinking about this topic, and hope that it is helpful in the months – and years – ahead. Please let us know if you would like to discuss in more detail.
3Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
27499 Riverview Center Blvd, Suite 108
Bonita Springs, FL 34134
Any opinions are those of Frank Hujsa are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.