I hope you are staying safe and warm on this snowy week. The first real snow fall of the year and it is only mid-October – 2020 is truly a strange year. As the Presidential election and rhetoric out of Washington on a stimulus bill among other things heats up I thought it would be useful to send an update on markets, the economy and what different election outcomes might mean to you and your portfolio.
As the pandemic continues to drag on, it does appear there is light at the end of the tunnel. There were definitely some dark times, panic and fear a few months ago, but it seems like much of that has faded. The economy is recovering at a pace faster than expected, unemployment is dropping, savings rates are up and the CARES Act/Fiscal Stimulus already enacted earlier this year is doing its job. Obviously, the news has recently been very focused around another stimulus package including support for states and municipalities, additional direct payments to citizens, help for small businesses and unemployment benefits. The reality is the last round of stimulus made people whole and personal income in the US was actually higher and remains higher than they were before COVID-19. It has done its job and without it, the economy would look dramatically different right now. That said, another stimulus package is warranted as we head into a winter season that will be difficult on many of the hardest hit sectors that remain depressed and those employed in those sectors. In recent days, the Democrats and Republicans are getting closer to agreeing on a deal. Whether that comes before the election or after is really a moot point. If it comes sooner it may dampen volatility, but volatility always remains high before a Presidential election – especially one as heated as this one.
So, what does the outcome of the election mean for your portfolio and the economy? Well, Biden has proposed many different policies – some negative and some positive. Here are a few of the highlights.
- Taxes – higher corporate tax rates, raising the top individual tax rate on those making over $400,000 a year, taxing capital gains as ordinary income versus current max rate of 20%, and closing some real estate loopholes among other things. Those would be negative to growth and have a serious impact on corporate earnings.
- Minimum wage increases – currently we have 29 states with minimum wages above the federal minimum of $7.25, but Biden is proposing to increase that to $15 per hour which is higher than every state currently.
- Infrastructure – he has proposed an infrastructure overhaul and “Buy American” requirement for federally funded projects to the tune of $2 Trillion dollars. This would be a positive to economic growth and corporate earnings. Trump has been proposing a similar bill for the past couple years, however, his bill is about half the size.
- Trade – he plans to take a more global approach to dealing with China on trade and patent infringements which would likely lead to a de-escalation of many tariffs already imposed. Another positive to earnings and stability as companies try to plan for the future.
When you boil all of that down it lowers earnings per share estimates for the S&P 500 by only 3.5%. That means the stock market will be able to withstand the tax increases as they will be offset by other positive measures. In addition, for 99% of Americans their after-tax income will only be reduced by 3% or less. None of those are outcomes that will tip the economy over. Other major considerations for the longer term economic outlook are interest rates and inflation. In general, the Democrats and Biden want bigger bills, more spending, and higher minimum wages. Pumping that much money into the economy will ultimately lead to inflation and higher interest rates regardless of what the Federal Reserve does. The Fed has stated they will keep rates near zero for years, but in the past month we have already seen long term rates start to tick up based on these expectations of more growth and inflation. Deficits and US interest payments on debt are rising so any increase in rates or inflation will continue to make financing these spending bills more expensive. Lastly, if the Senate flips to the Democrats they will not have a super majority. That will likely be a positive to some balance in fiscal policy as Biden will need to remain pretty centrist to enact many of his policies.
So, in terms of portfolios that means the things that will likely do better in both a Trump or Biden administration are things like technology, healthcare, industrials, and materials. Things that are likely to continue to face headwinds due to longer term structural issues are financials and energy. We have recently added positions in the areas we like, but we do continue to hold some elevated cash levels. The reason we have some additional cash is because there will be volatility and when there is a clearer picture on the election outcome and what a stimulus package looks like we will re-deploy that. In addition, all of the positives still hinge on the path of the virus and a timeline for a vaccine. The reality is we will likely have a vaccine approved for use in the near term, but until it is widely distributed and people actually get it, COVID is not going away. That will continue to have an impact on the economy and the way we live our lives, work and go to school. But, we have to remember that the economy and the stock market are different things. While they are ultimately linked and stock prices cannot rise without a rising economy, many of the publicly traded companies are actually selling more and benefiting form a stay at home, work from home economy. These trends that have been developing for a long time have been accelerated and they will benefit in revenue, sales, and profits. In turn, your portfolios are and will continue to be positioned to take advantage of that.
One final point on the planning side of things (we are financial planners after all). Biden has proposed making some major changes to the estate tax laws. He is proposing to reduce the estate tax exemption to $3.5 million a person ($7 million for couples) with a tax rate of 45% for anything over that. The current exemption is $11.58 million a person ($23.16 million for couples) with a tax rate of 40%. That is a major change and may require some year-end planning to reduce future taxes. We will be reaching out to those we know are impacted, but if you have any questions please reach out.
In closing, while we are not out of the woods, either economically or in terms of the virus, we are on a path to recovery. Whether Biden or Trump get elected, ultimately there will be another stimulus package to help those in need and a vaccine will be developed. Many of us now know what to expect and have settled into a different lifestyle. Much of the unknown, fear, and panic that was felt in March and April has subsided. At the end of the day, we are Americans. While it may feel like an extremely divided nation at this moment, we will do what is right for each other, our families, and our neighbors. We will get through this and as we look back at 2020 years from now it will be remembered as a turning point in America. A moment when we faced some major challenges and overcame them like we have always done. We are optimistic for the future of America and all its citizens.
As always, thank you for your trust and confidence. If you have any questions, please reach out. Stay safe and stay warm!
Robert J. Phillips, CFP ®
Greater Midwest Financial Group, LLC
3222 Rice Street
St. Paul, MN 55126-3047
Phone: (651) 490-9790 Fax: (651) 490-9788
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.