The time has come once again to head to the polls and elect our
nation’s leaders. Many things ride on our decisions regarding our voting
practices. One of the questions I hear often is, “If ________________________
is elected, will it hurt my investments?”
It seems like this question would have an easy answer. That depending on who wins the election, the market could experience a massive drop-off. But history from the mid-1940s through the present shows little correlation between presidential elections and the market’s performance (in the mid-to-long term) on investments. While short-term volatility may occur during an election year, those gains and losses are usually washed out quickly, making them a non-issue.
A study by U.S. Bank revealed elections slightly affect the market’s performance, but not how most people would think. Their research discovered a single party controlling the White House and Congress correlates to no statistically significant change. However, positive excess long-term average returns came when Democrats controlled the White House and Republicans controlled Congress or control was split between House and Senate.
The scenario for below average return of long-term average occurred when Republicans controlled the White House and Democrats had full control of Congress. While the correlation is there, the results get a little murky whenever you consider the percentage of which party has held power over the last 40 years.
Over the last 39 congresses, Democrats have held Congress more often than Republicans, but the Presidency has been split evenly. Considering this when looking at findings from the U.S. Bank study further reduces the cause-and-effect of how Washington affects Wall Street.
The short answer? When it comes to investments and markets, you are better off staying the course with your portfolio and focusing on the long term. Making changes based on the election will have little to no long-term effect on how the market will play out. Businesses are great at adjusting to new realities quickly to keep earnings and growth moving in the right direction.
How politics affects your portfolio matters more about the policies or regulatory shifts Washington implements. Usually, when one party has full control, we see less collaboration on policies, which means a swing back when the other side gains control again. This policy pendulum causes short-term disruption in the markets but fewer effects on long-term outlooks.
But when both sides work together to enact policy, more significant policy shifts with staying power will impact your long-term outcome. For example, recent SECURE 2.0 changes will have long-term impacts on portfolios — changes like extending the age for required minimum distributions from retirement accounts and allowing employers to help employees with student debt through employer matching funds. These policies help increase what employees can set aside for retirement savings.
Tax changes also affect your portfolio. The current election could affect the discussions and changes to tax reform laws that went into effect in 2017 when the Tax Cuts and Jobs Act expires in 2025. If taxes return to 2016 levels, citizens will experience changes to:
Tax brackets. Individual income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% will return to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, with different income-level break points than current tax code.
Standard deductions. If changed, they would be reduced by more than half.
Child tax credits. These also would be reduced by half.
Business income deduction. This includes 20% qualified business income deduction for self-employed people and those owning an interest in S corps, partnerships, LLCs, and other pass-through entities.
Two other tax breaks expire in 2025: an Obamacare health premium credit for individuals buying insurance through the marketplace and student loan debt forgiven from 2021 to 2025. These debts were exempt from the general rule that income from cancellation of debt is taxable.
The next Congress — no matter the controlling party — will face all of this along with the priorities of whoever wins the White House. Their decisions will ultimately affect your overall portfolio growth, since they may reduce or increase the amounts you can put into savings.
When you head to the polls this fall (and, yes, Christians are biblically mandated to be involved in civic responsibilities), weigh your options and pray for the wisdom of our elected leaders to provide the best outcome for our country.
“Seek the peace of the city whither I have caused you to be carried away captives, and pray unto the Lord for it: for in the peace thereof shall ye have peace” (Jeremiah 29:7).
About the Writer: John Brummitt graduated in 2011 with an MBA from Tennessee Tech University. A 2004 graduate of Welch College, he has been with Richland Ave Financial (Board of Retirement) since spring 2006 and became the director in January 2016. Learn more about how the Board of Retirement can help you: www.boardofretirement.com.
