Do you wonder whether the market will rise or fall if Joe Biden wins on November 3? What about if current polls are as wrong as they were in 2016 and Donald Trump wins re-election? There are a variety of things we can try to predict based upon who we think may win but one thing is certain, the market is going to be incorporating those expectations into prices every day. Following are some of my thoughts regarding what could be the impact of a Biden or Trump win.
Taxes
Donald Trump and the GOP controlled House and Senate passed the Tax Cuts and Jobs Act of 2017. Most of the tax cuts included in the Act (see my Tax Reform Tidbits article from 11/3/2017) are scheduled to expire in 2025.
President Trump has pledged to cut taxes even more if re-elected. He has proposed a 10% middle-class tax cut that will include lowering the 22% marginal tax rate to 15%. For 2020, the 22% marginal tax rate applies to income between $40,125 - $85,525 for individuals and $80,250 - $171,050 for married couples filing jointly.
Vice-President Biden has said he will reverse some of the TCJA changes, particularly for top earners. He has suggested increasing the top marginal tax rate from 35% to the pre-TCJA rate of 39.6% for income over $400,000. These changes would increase tax revenue paid to the government by about $500 billion.
Social Security
President Trump has proposed deferring the Social Security portion of the payroll tax of 12.4% on wages and self-employment income up to $137,700 this year, which is split between employers and employees. He has pledged to forgive the deferment if re-elected. Even without the deferment, payroll taxes have taken a hit due to job losses caused by the Covid-19 pandemic. Social Security's $3-trillion “Trust Fund” (an accounting myth) could run out before the end of the decade. Trump has even hinted at ending the ruse of there being a separate trust fund and just funding Social Security out of general government revenue, which is what Congress did in 2011 to cover the temporary payroll tax cut enacted by the Obama administration.
Biden has proposed applying the payroll tax to wages above $400,000 to avoid insolvency of Trust Fund. What is likely, no matter who is elected, is that taxes will go up and/or benefits will be lowered to avoid insolvency.
The Economy
While a Biden victory may not feel as market friendly as a Trump re-election, Congress, unexpected events, and broken campaign promises (remember “Read my lips…..”?) all will likely have unexpected impact on the economy and markets.
Fortunately, history shows us that the market can perform well under leaders from either party (Exhibit 1.)
Exhibit 1.
Image courtesy of Dimensional Funds.
Even more encouraging, markets have rewarded long term investors under presidents from both parties. (Exhibit 2).
Exhibit 2.
Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Image courtesy of Dimensional Funds.
One thing is certain, the election will provide reasons for questioning our investments. We believe that trying to outguess the market based upon an upcoming election is a recipe for ongoing indigestion. If you have concerns about how your portfolio is positioned, it probably is a good time to review your overall financial plan to better understand how various scenarios may stress your plan. Get in touch for a review if you are concerned.