By Daniel McGarvey, CFA, Senior Portfolio Analyst, on behalf of Stonebridge Financial Group advisors
With the presidential election in November rapidly approaching, we continue to weigh the implications of a victory for either party. We are not assuming any particular outcome since it appears to be a toss-up for both the White House and Congress, but we have some loosely-held expectations of who might benefit from either victor. For example, we expect that a red wave would bring about deregulation that benefits banks, healthcare, and oil companies, and likely result in increased aerospace and defense spending. A blue wave would likely benefit technology, telecommunications, industrials, and renewable energy, along with being more favorable for some countries like China or Mexico that Republican candidate Donald Trump is less friendly towards.
That being said, some of these “obvious” sector calls have not always translated to better performance when expected. A prime example is that clean energy stocks performed far better under Trump’s administration than they have under President Biden’s so far, and the exact opposite is true for natural gas and oil stocks. Similarly, there is a common perception that Republican control will lead to more fiscal responsibility, and maybe it would in this instance, but in the past neither party has been able to truly claim fiscal responsibility. Federal spending costs have significantly exceeded federal revenue levels in most administrations across the decades (see chart in bottom left).
In the same vein, stock market returns and economic growth have generally trended positively regardless of which party is in office (see chart below), and the difference in market performance between the two parties has been minimal over the last century. The best strategy by far has been to stay invested through any and all combinations of presidential and congressional control.
One of the most significant economic consequences of the approaching election is how the sunset of provisions in the Tax Cuts and Jobs Act of 2017 will be handled next year. With a Trump win, the tax changes will likely be extended or even made permanent, while a Harris win would probably mean that only some tax cuts will be extended. Democrats presumably don’t want to raise taxes on the lower and middle classes, but with debt servicing costs so high they have put forth ideas like raising the corporate tax rate to 25% or 28%, raising the top individual tax rate to 39.6%, adding a new tax rate for incomes over $1mm, raising estate taxes, and more. These negotiations will primarily be fleshed out next year, and they could be contentious if there is a split Congress, but ultimately any tax cut extensions will need to be offset by some spending cuts or tax increases elsewhere.
Unfortunately, we do not have any special insight on how this election will play out, and there will surely be more twists and turns over the next couple months. What we do know is that history suggests that it would be unwise to panic or make drastic investment changes, like going all in on certain sectors or dumping equities out of fear. We might make small adjustments if a certain outcome becomes more likely, but we are wary of overreacting. Additionally, we suggest paying close attention to the tax cut sunset situation as it develops, which is a subject we will likely discuss in more detail before long.
The S&P 500 returned 2.43% in August after beginning the month with a -4.7% drawdown. The Bloomberg US Aggregate Bond Index rose 1.0% as the 10-Year Treasury Rate fell to 3.91% and the Federal Reserve communicated its desire to begin cutting rates in September.
Charts provided by Invesco Distributors, Inc. and YCharts, Inc.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Daniel is a Senior Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.
Market Implications of the Election
By Daniel McGarvey, CFA, Senior Portfolio Analyst, on behalf of Stonebridge Financial Group advisors
With the presidential election in November rapidly approaching, we continue to weigh the implications of a victory for either party. We are not assuming any particular outcome since it appears to be a toss-up for both the White House and Congress, but we have some loosely-held expectations of who might benefit from either victor. For example, we expect that a red wave would bring about deregulation that benefits banks, healthcare, and oil companies, and likely result in increased aerospace and defense spending. A blue wave would likely benefit technology, telecommunications, industrials, and renewable energy, along with being more favorable for some countries like China or Mexico that Republican candidate Donald Trump is less friendly towards.
That being said, some of these “obvious” sector calls have not always translated to better performance when expected. A prime example is that clean energy stocks performed far better under Trump’s administration than they have under President Biden’s so far, and the exact opposite is true for natural gas and oil stocks. Similarly, there is a common perception that Republican control will lead to more fiscal responsibility, and maybe it would in this instance, but in the past neither party has been able to truly claim fiscal responsibility. Federal spending costs have significantly exceeded federal revenue levels in most administrations across the decades (see chart in bottom left).
One of the most significant economic consequences of the approaching election is how the sunset of provisions in the Tax Cuts and Jobs Act of 2017 will be handled next year. With a Trump win, the tax changes will likely be extended or even made permanent, while a Harris win would probably mean that only some tax cuts will be extended. Democrats presumably don’t want to raise taxes on the lower and middle classes, but with debt servicing costs so high they have put forth ideas like raising the corporate tax rate to 25% or 28%, raising the top individual tax rate to 39.6%, adding a new tax rate for incomes over $1mm, raising estate taxes, and more. These negotiations will primarily be fleshed out next year, and they could be contentious if there is a split Congress, but ultimately any tax cut extensions will need to be offset by some spending cuts or tax increases elsewhere.
Unfortunately, we do not have any special insight on how this election will play out, and there will surely be more twists and turns over the next couple months. What we do know is that history suggests that it would be unwise to panic or make drastic investment changes, like going all in on certain sectors or dumping equities out of fear. We might make small adjustments if a certain outcome becomes more likely, but we are wary of overreacting. Additionally, we suggest paying close attention to the tax cut sunset situation as it develops, which is a subject we will likely discuss in more detail before long.
The S&P 500 returned 2.43% in August after beginning the month with a -4.7% drawdown. The Bloomberg US Aggregate Bond Index rose 1.0% as the 10-Year Treasury Rate fell to 3.91% and the Federal Reserve communicated its desire to begin cutting rates in September.
Charts provided by Invesco Distributors, Inc. and YCharts, Inc.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
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