How to Deal with the Uncertainty Surrounding the 2016 Election

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Several clients have recently told me they want to go to cash until after the election is over. Maybe they believe making investment decisions will be easier after a new president is elected. But wait, the president elect will need to pick his or her cabinet, which will create uncertainty. They will reveal their priorities during the State of the Union address in January, which will, of course, create uncertainty. Even knowing these things in advance wouldn’t tell us how successful they may be at getting their agenda past Congress. Finally, how will any of this impact the financial markets?

Once the election is over, Congress must make important decisions about spending, possibly before the end of the year. A new president and potential shift in Congressional power make the chances of a major bill getting passed slim. President Obama’s 2017 outline provides some insights into what might be in store for the new year.

Childcare and early education

Congress has been looking for ways to ensure low- and moderate-income working families with young children have access to quality, affordable childcare. One proposal that has some support is to triple the current Child and Dependent Care Tax Credit (CDCTC) from $1,000 to $3,000 per child under age 17. Only families with income under $120,000 would be eligible for the credit.

The other proposal in this area is an initiative to provide all four-year-olds from low- and moderate-income families with access to high-quality preschool. No tax incentives are tied to this proposal. The budget would provide grants to states who are currently developing these programs.

Higher education

A proposal to make two years of community college free for responsible students was talked about frequently during the campaign. A partnership with the states would allow students to earn the first half of a bachelor’s degree or an associate’s degree and acquire skills needed in the workforce at no cost. A more likely compromise would be to streamline and expand education tax benefits by consolidating the Lifetime Learning Credit into an expanded American Opportunity Tax Credit. The credit would be available for five years and refundable up to $1,500.

Tax law changes

The president’s budget included increasing taxes by $955 billion over ten years. All of the tax increases were aimed at wealthy taxpayers and corporations. The tax increases included:

  • Raising the tax rate on long-term capital gains to 28% for taxpayers in the top tax bracket. The current rate is 20%.
  • Place a cap on the amount of itemized deductions to no more than 28% of income.
  • Ensure the wealthiest Americans pay at least 30% in income taxes after they’ve taken all deductions available to them (known as the “Buffet Rule”).

None of these tax proposals are new. They have been contained in many of President Obama’s past budgets but did not become law.

Financial markets after a new election

The financial markets have survived many election cycles. You have no doubt heard from different sources how this election year is different. However, from the financial markets perspective, it is not any different. We will have a new president in 2017 with a new cabinet and legislative agenda. That agenda may or may not get passed and what does pass will have an impact on some companies. Those companies will adjust to the changes and move forward. After the president is elected and his or her new platform is revealed, investors will have a better sense as to what industries might either benefit or suffer.

You no doubt have a favorite political party but history has also shown it doesn’t really matter to the financial markets which party wins. Since 1900, the stock market has done slightly better under Democratic administrations than Republican, even though Republican policies are generally thought to be more pro-business. Historically, the first year for a new president has not been particularly good for stocks, regardless of party. The theory is that a new president feels they have more leeway to push through less favorable policies that create uncertainty. The uncertainty negatively impacts businesses and consumers. The stock market has generally performed much better in the third year of a new president, after the mid-term elections.

It’s important to remember that the stock market is made up of businesses. Businesses have a great track record for adjusting to political and economic change. The policies of the next president will impact some businesses positively and others negatively. That’s why portfolios need to be diversified and balanced between stocks and bonds. Maintaining a balanced portfolio will allow investors to take advantage of whatever opportunities present themselves over the next several months as politics unfold. For an investor with a long-term perspective, today is still the best time to invest.

Rick’s Tips:

  • There will still be a lot of uncertainty after the election is over in November.
  • A proposal to triple the CDCTC could help low and moderate income families access affordable childcare.
  • The stock market has historically not done well in the first year of a new presidential term.

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