Election Thoughts

Written by: Ryan Bouchey

We’re less than a week away from what many consider the biggest election of our lifetime (aren’t they all?). I wanted to highlight some talking points we’ve been discussing  with clients regarding two of the biggest concerns – the election and Covid.  At this point, there is a lot of overlap between the two and one may have a greater impact than the other. My goal here is to focus on the issues at hand in a non-partisan manner while providing commentary as to what we should be thinking about as we head into next week.

History as our Guide

With history as our guide, we know one thing to be certain – election results have done little to stop the stock market. In fact, if you look at the last 90 years or so, whether it’s a Democrat or Republican, there has been one common theme with the stock market – IT GOES UP. We touched upon this with a few slides right around the 18-minute mark from our latest Webinar- Bouchey Financial Q3 Webinar

 

As great as history has been serving as a guide, as investors we must be prepared for anything. A great quote from Stanford Professor Scott Sagan (I came across this in Morgan Housel’s latest book The Pyschology of Wealth) : “Things that have never happened before happen all the time.” Just because it hasn’t happened, doesn’t mean it couldn’t happen. With that said, let’s dig a little deeper into the issues or concerns we are facing now.

 

Election Concerns

The majority of the election concerns we hear from clients have to do with a Biden win (uncertainty). The markets do not like uncertainty and regardless of your political leanings, we understand what we’re getting with Trump. There is more uncertainty with a Biden victory next week coupled with a flipping of the Senate – a Blue Wave Victory. Given our current political divisiveness, many consider this a worst-case scenario with the sweeping changes it could bring about. I’d like to touch upon, and maybe even debunk, some of these fears:

• Supreme Court Packing – Joe Biden hasn’t really come out to say he’s against this, so many may feel this is a concern. It’s possible this could happen; however I don’t see how it impacts the economy or markets.

 

• Removal of the filibuster in the Senate – this is a genuine concern in that partisan legislation would be much easier to pass without the Senate filibuster. This has historically been a legitimate check and balance and a way to pass somewhat bipartisan laws. Given how many “losses” the Democrats have felt in recent years this is something to watch for.

 

• Higher Tax Rates – this is a legitimate concern. There are three areas where this is a possibility:

1. Corporate Tax Rates – If Corporate tax rates move from 21% to 28%, it will have an impact on bottom line. The stated tax rate is generally much different from a corporations’ effective tax rate so we may not see a 7% drop being likely. These corporations continue to employ the best tax departments and will be resilient with any change. The market is always forward looking and this would be a short-term, if any, impact.
2. Highest Tax Bracket Income Rates – I could see the highest earners ordinary income rates go up from 37% to 39.6%. This isn’t great, but it will not derail our economy either. We saw it with the recent tax cuts – yes the market liked it initially, but it hasn’t driven the economic growth it was intended to do if we’re being honest. Increasing tax rates on middle income earners would be political suicide so it is likely this will be isolated to the top income bracket.
3. Long-Term Capital Gains Rates – Long-term capital gains rates increases are on the table moving forward. Again this would be isolated to high income earners. If so, it’s not unreasonable to think there would be some short-term volatility due to folks doing some tax planning and taking gains before rates go up. Public markets will continue to be the best wealth generators and any impact will be short-term in nature.

We’ve seen over the past few weeks that the odds of a Biden victory have gone up. We know from four years ago this is by no means a foregone conclusion. Many Wall Street forecasts show that a Biden victory and Senate flip would be a positive to the economy and markets – mainly due to potential for stimulus spending and less partisan friction. Forecasts are never 100% accurate, but the argument can be made that these fears could turn out to be a boost moving forward.

Covid Concerns

The bigger focus may need to be around Covid and the current/future impact on our economy. There is so much to digest with Covid and what’s happening, but let me summarize it the best I can:

• The Wall Street vs Main Street disconnect is mostly a myth – in aggregate (Webinar at the 21:30 mark). I want to stress in aggregate because I’ve seen first-hand and anecdotally the struggle many small business owners are facing right now. When you step back and take a 30,000-foot view of the situation the wall street and main street disconnect move closer to alignment. In fact, income rates / spending rates / savings rate were all UP this year through the summer. This is hard to grasp when nearly 30 million jobs were lost, and the economy basically shut down for months on end. This goes to how powerful the Fed intervention was.

 

• We’re currently seeing an uptick in permanent job losses and higher income earners losing jobs. Most of this is based on the Covid slowdown, but we’ve also seen businesses doing more with less with the work from home environment.

 

• Covid isn’t going away and the numbers are getting worse. Luckily the way we treat Covid is improving and death rates have been going down. But infection rates are on the rise and it’s hard to see a situation where the government opens the economy fully with our current numbers.

 

• A vaccine will be great, but who knows the actual timeline. The other issue – not everyone will take it. This will be a slow process to get everyone to take a new vaccine so in the near term may not be a cure-all for the economy to open.

 

• Given where we are at in the Covid cycle and winter on the horizon, the biggest short-term boost to the markets will be through Federal stimulus.

 

What to do now?

• Do not overreact – could the market go down and be volatile over the next few weeks? Absolutely. Is it a foregone conclusion – absolutely not. The last two presidential elections (Obama in 2008, Trump in 2016) we were warned that the market was going to crash and never recover. The actual outcome was far different. The truth is that the President has very little effect on the economy or stock market in real time.

 

• Timing the market is hard – this is nothing new, but I want to share the hardest part of timing markets. Certainly we can get timing trades right, and have it be based on good data. The difficult part is if you were to raise cash now because of fear over the election, and the markets took it in stride and continued to go up. It’s easy to think I will just choose to get re-invested if that happens. The reality is much different. No one likes buying in at higher prices. Your brain will focus on reasons why the market still has a chance to fall and continue to hold cash until there is a buying opportunity at a lower price. If (and when) this doesn’t happen, its easy to miss a 20%, 30% or even more jump in the market. For most, sitting on the sidelines like this is detrimental to your long-term rate of return and retirement goals.

 

• Turn off the news – seriously turn it off. Not just the financial news as my dad alludes to, but all news. Don’t watch it this week. Whether its Fox, CNN, MSNBC – turn it all off. I promise you will sleep much better and be much happier. Read selected stories, authors or blogs to keep you informed on matters – but give turning the news off a try. I’ve done it and my mental health and investment process is much better for it. Find a good show on Netflix or catch up on some books and thank us later. If you need recommendations call us!

 

• Evaluate your short-term cash needs – do you have a major cash need coming up soon? If so, take the money out now. You shouldn’t have this in the market anyways. Anything else should be invested. Even if we get volatility these next few weeks, nothing about the election should make it last. We have elections every two-years and its never changed our long-term approach.

 

• Politicians Crave Power – for those worried about the blue-wave crashing our markets and economy, remember politicians in Washington crave power. I highly doubt they will implement policies that would cause long-lasting economic pain and suffering. If they do, they will be voted out. Democracy is one of the pillars that makes our country exceptional!

 

Keep in mind, we have Presidential elections every four years and never once has it changed the long-term stock market trajectory. We don’t see next weeks outcome of Biden vs. Trump as being any different. We will be focusing on what can impact the market following the election – Fed stimulus, employment numbers, and our continued efforts to fight back Covid. These issues will be most important as we head into 2021.  The election results may play a role in this – however to predict this string of outcomes now would be impossible to do. As always, please give myself or any of our advisors a call if you’d like to discuss these issues before Tuesday’s election.