What a month. Trump was almost assassinated, Biden gave up the political equivalent of his car keys, and we had a global software crash to boot. This seems like a good opportunity to discuss the upcoming election, and how the outcome may interact with the economy and the markets.
It is very common for us to get questions about what will happen to the market if one candidate wins versus another. While the crystal ball is still in the shop, there is no shortage of historical data and prior election studies that should help guide a path.
Elections & Markets
A study released this year (source) provided some key takeaways and echoes many prior studies. The findings? Markets have trended higher regardless of which party wins the presidency, and the same is true for how Congress is aligned (either sweep or gridlock). Furthermore, there is no meaningful difference between which party wins the election, or which party controls Congress. One interesting insight the study highlighted was that if the S&P 500 is positive in the three months before Election Day, the incumbent party usually wins (20 out of 24 times). Again, this trend gives us no statistical insight into how the 1-4 years post-election will look from an investment perspective.
Volatility
What is likely, especially with this election, is volatility. It may come in the form of social volatility like we saw in 2021, or market volatility like we saw in 2020 with the pandemic. A helpful anchor point is to remember how inherently short-term the news of an election actually is. The stock market is easily distracted by shiny objects (like AI) and this election will be no different. The good news is that publicly traded corporations release their quarterly earnings every three months, which acts as a reality check for the market. If a company has poor performance over the prior quarter, its stock price takes a hit, and if things go well, its stock price will reflect it. As we have seen over the last 4+ years, the markets react, then they move on.
Tax Cuts & Jobs Act Sunset
The most likely direct impact of the election will be the fate of the Tax Cuts and Jobs Act (TCJA) of 2017. This program was enacted by the Trump Administration and is set to expire at the end of 2025. If the program expires, and no new tax laws are passed, many tax breaks will revert to their pre-TCJA levels. These changes include the following:
The standard deduction goes from its current level of $29,200 (married filing jointly) back to roughly half that amount. This is the amount of income that is excluded from taxation, so less exclusion means higher taxes.
The 12% bracket will revert to 15%, the 22% bracket will go to 25%, and so on.
The Child Tax Credit will be reduced from $2,000 to $1,000 per child.
This will be the main focus in financial circles because of its direct financial impact on everyone’s taxes, and any updates will be shared in future emails.
At the end of the day, investments are for the long term and that is where we should remain focused. Yes, the political and social events of today matter, but only in the context of how things will evolve over the next 5,10 and 15+ years. For the last 100+ years, the US economy has shown incredible resilience in tough times and sustained growth in good times. Corporations are incentivized to make profits for their shareholders, and history points towards a long, successful track record.
As always if you have any questions, please don't hesitate to give us a call.
Citrus Wealth Management
O: 909.312.4412 // F: 909.312.4441
1461 Ford Street, Suite 103, Redlands, CA 92373
Any opinions are those of Citrus Wealth Management and not necessarily those of Raymond James. The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results.
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