We have a winner!
Our base case in this election was following the polling that was consistent over the past several months a Biden presidency, and a Democrat Senate. While the Presidency will flip, it is looking more unlikely that the Senate will. It is not a done deal, but the Georgia runoffs has a strong likelihood of keeping the Senate in Republican hands.
What does this mean to you? There is always a lot of talk about which scenario is better for the markets. Here is the historical data:
The highest returns of this chart show a Democratic President with a split congress. This is exactly what we are anticipating. We do not, however, put a lot of weight on this data. There are too many other variables that impact stock performance to rely on this relatively small sample size. Recessions, interest rates, and policy considerations have a much bigger impact than what party is in what office.
The results of the election will, however, have a meaningful impact on our expectations of tax rates moving forward. Prior to the election with the polling data that was available, we were anticipating some dramatic changes that the Biden administration had promised:
- Capital Gains tax increase
- Corporate tax cuts repealed
- Reduction in the ~$11.5 million estate tax exemption
- Social Security tax cap eliminated
Should these changes be implemented, there would have been many opportunities to take advantage of the tax rate disparity between years 2020 and 2021. Now, however, if we rely on the current estimates of the Senate polling, this is highly unlikely to happen.
This has caused our thinking to change on increasing taxable events in 2020, and put us back on an even glide path with regards to taxation. Increasing income in 2020 to take advantage of lower tax rates now, should not be necessary. There is still the estate tax rates that are set to sunset in 2025 an reduce from ~$11.5 million, down to $5 million, but there is a lot of time in the legislative process before that happens.
What could the results of this election mean going forward for the markets? The results actually bolster our base case scenario. We will continue to have the Federal Reserve on hold with regards to interest rates. Lower for longer is the mantra. We will have a new administration that will push a different agenda. An infrastructure bill will be the lowest hanging fruit. Both parties have been anxious to get one on the books. If a Biden administration wants to get a quick bi-partisan win-win, this would be the place they will go.
Most importantly, both sides want the recovery to continue, and will do everything in their power to make that happen. Austerity from the Federal Government will not be spoken out for the foreseeable future. While real returns will be dampened by the expected impact of inflation, prices should continue their upward march; this is for products and services in addition to equity prices.
As far as the overall market is concerned, there was much angst going into this election, but the outcome has been as close to perfect as the market would want. We always need to bear in mind, that this is a marathon, not a sprint. Today and tomorrow, are much less important than next year and the three that follow that.
As always, please do not hesitate to contact us if you should have any questions.