So much of our focus this year has been on Covid-19 that you might have missed a major milestone that we passed recently. We are now less than 100 days away from what promises to be a very contentious and impactful presidential election. The economic side of the debate has started to take shape now that former Vice President Joe Biden has released some new tax proposals.
Of course, any presidential policy pitched on the campaign trail has to be taken with a grain of salt. And in my experience, folks tend to overestimate the impact that any one president can have on the economy, sometimes to the detriment of their long-term planning.
Still, it’s worth examining how a President Biden might affect the economy. So, on today’s show, we dig into the Biden tax proposals and also discuss what market history tells us about presidential elections, the markets, and your nest egg.
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1. Putting politics in perspective.
It seems like only yesterday that Keen Wealth clients were asking us how to plan for a President Hillary Clinton or a President Donald Trump.
Four years and the longest bull market in history later, what’s had the biggest impact on our economy? President Trump’s new tax laws? Trade disputes with China? Replacing NAFTA with the USMCA? Democrats retaking the House in the midterm elections? The SECURE Act?
No, the biggest impact was made by a new infectious disease that started on the other side of the world.
Covid-19 is the most serious recent example of why you can’t let politics affect your financial planning. Whether you agree or disagree with proposals that Donald Trump or Joe Biden make between now and November, the economy is susceptible to forces beyond the control of any one president. In most cases, hurricanes, corporate earnings, the housing market, and novel coronaviruses don’t care who’s in charge at a given moment.
And, for the most part, neither do the markets. From Pearl Harbor to Black Monday, from 9/11 to the Great Recession, right on through Covid-19 to Summer 2020, the markets find a way to absorb volatile conditions, recover, and grow. The president can make proposals, and Congress can turn some of those proposals into law. But business cycles, consumer spending habits, and Federal Reserve policy will all have their say as well.
Ultimately, once politics and opinions settle back down, presidential elections don’t affect the economy as much as people think. According to our research providers at LPL, GDP fluctuates by less than 1% depending on whether Congress is under Republican control, Democratic control, or split between the two. And in all three scenarios, overall returns remain positive.
2. The market is a powerful predictor.
Interestingly, while the president’s impact on the economy might be overstated, the economy does a pretty accurate job of predicting the next president. According to LPL, since 1928, the incumbent party has won 87% of elections when the S&P 500 has been up the three months prior to the election. Back in 2016, when Hillary Clinton was ahead in most polls, down markets correctly predicted a Donald Trump upset.
Complicating the 2020 picture is that, since 1924, the incumbent party has lost the presidency whenever there has been a recession in the two years leading up to the election. Now, before Covid-19, our economy was doing very well. But if we’re still in a recession in the early fall, history says that could be a problem for President Trump.
3. Joe Biden, high earners, and corporations.
On the other hand, Joe Biden’s plans might ruffle some feathers in the business community.
The Biden tax proposals include an increase in the payroll tax and the Social Security tax for individuals who earn over $400,000 per year. Biden would also move the 37% tax bracket back up to 39.6% on income over $400,000, which is where that bracket was before President Trump’s 2017 Tax Cuts and Jobs Act. Biden also proposes taxing long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million.
As for businesses, Biden proposes increasing the corporate tax rate from 21% to 28%. Given how many tax deductions large businesses typically take, it’s hard to estimate just how big an impact this would have on corporate earnings or tax revenue. But Biden also proposes an alternative minimum tax of 15% on companies that show a profit over $100 million and doubling the tax rate owed by foreign subsidiaries to 21%.
4. Separate your politics from your portfolio.
Of course, if Vice President Biden maintains his current lead in the polls and wins the presidency in November, that doesn’t mean taxes are automatically going up for high-net-worth individuals and corporations. The Biden tax proposals would still have to work their way through Congress, where the Senate could still be in Republican control. Covid-19 and other outside events will also influence how leaders from both parties think about the best ways to keep our economy progressing.
I will make one prediction today that you can take to the bank: Whoever wins the presidency, a great many people are going to be happy, and a great many people are going to be upset. And folks who aren’t thrilled about our next president risk seriously wounding their financial plans if they can’t separate their politics from their portfolios. Neither President Joe Biden nor a second term for President Trump would be reasons to make dramatic changes to your saving or investing strategies. Your fiduciary advisor might identify some potential opportunities or liabilities if the political landscape changes. But those are the kinds of adjustments we expect to make over the course of a financial plan. What we don’t plan to do is jump in and out of the markets depending on who’s president.
This is such an important point that I have two additional resources I’d like to share with you today.
The first is an article I recently published for Forbes which has more info about why you shouldn’t let politics affect your investment strategy.
The second is a virtual event with Washington insider Greg Valliere coming up on August 27th. Greg spoke to clients and friends of Keen Wealth ahead of the 2016 election and we found that presentation so informative that we wanted to talk to Greg about 2020 as well. Unfortunately, we can’t host Greg in person this year, but since this will be a virtual event it’s even easier for you to attend. If you haven’t received an invite from us or if you’d like to extend an invitation to friends or family, email us at email@example.com and we’ll get you on our list.
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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