As the 2024 presidential election is in its last stretch, many are wondering how the outcome might impact their finances. The answer, surprisingly, is that while politics matter to voters, markets tend to have a longer-term perspective. Let’s explore how elections have influenced markets and tax policies historically and what this could mean for you.
Markets Over the Long Term
Looking back at the stock market’s performance under different administrations, it's clear that both Republican and Democratic presidents have seen market ups and downs. The bigger picture shows that the market's long-term health is tied more to the resilience of the U.S. economy than the party in power. While day-to-day news might cause fluctuations, the market has consistently shown a positive trend over time, regardless of who occupies the Oval Office.
Is a Split Government Better for Markets?
Interestingly, markets often perform well when control of government is split between the two major parties. Historical data suggests that a Democratic president and Senate combined with a Republican House has led to the best market returns on average. The reverse combination—a Republican president with a Democratic House—also fares well. This balance seems to create an environment that investors find appealing. The combo of a Republican president and Democratic Congress may have low results because of the 1973 oil crisis and 2008 global financial crisis bear markets.
What Really Drives the Markets?
While election results may bring short-term market volatility, long-term market movements are more tied to underlying economic trends. Factors such as economic growth, inflation rates, and business conditions are more reliable indicators of market performance. If the economy is improving, markets typically respond favorably, regardless of the political landscape.
How Tax Policy May Affect You
One area where elections can have a direct impact on your personal finances is tax policy. There are two contrasting visions for taxes, particularly around individual rates. The biggest disagreement appears to affect individuals earning over $400,000 annually.
Keep in mind this article is for informational purposes only and is not a replacement for real-life advice. The tax policies outlined are based on assumptions and will be subject to revisions during the legislative process. We encourage you to consult your tax, legal, and accounting professionals before modifying your tax strategy.
Campaign ideas and proposals frequently don't translate into actual policy. This is because they often need Congressional approval, and a slim majority in the House or Senate makes passing legislation challenging, especially with the 60-vote Senate threshold. Additionally, new presidents often abandon or scale back proposals to negotiate and gain support, making final policies less ambitious than campaign promises.
The Future of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 overhauled the federal tax code by reforming individual and business taxes.
Although some provisions were permanent, most individual tax changes are not. Unless extended, many of the changes implemented will expire at the end of 2025.
There has been some speculation that many of the TCJA provisions would be allowed to expire. However, based on the announced tax policies of both candidates, the lower rates may remain for the vast majority of taxpayers (those with incomes less than $400,000). The significant difference between the two proposals is the tax treatment for those making more than $400,000. Keep in mind that the president can lay out a tax policy, but it is up to Congress to pass any tax legislation into law.
If you fall into this higher income bracket, now might be the time to review your financial strategies to prepare for possible changes. We always welcome collaborating with your tax professional to help align your financial and tax strategies.
Staying Focused on Your Long-Term Goals
Elections might stir headlines and cause temporary market fluctuations, but your long-term financial strategy should stay the course. Building a diversified portfolio that aligns with your goals, time horizon, and risk tolerance will help you navigate any political uncertainty.
We’re Here to Help
If you're already a client and have concerns about how the election might impact your investments, feel free to reach out to us. For those not currently working with a financial professional, we’d be happy to review your financial approach and help you plan for the future.
Sources:
Baird.com, March 14, 2024, at https://www.bairdwealth.com/insights/market-insights/baird-market-strategy/2024/03/all-that-matters-elections-and-your-money/.
U.S. Bank, June 21, 2024, at https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html.
Tax Foundation, June 2024, at https://taxfoundation.org/research/federal-tax/2024-tax-plans/#Topics.
CNBC.com, June 13, 2024 at https://www.cnbc.com/2024/06/13/biden-tax-policy-expiring-trump-tax-cuts.html.
Mitch Zacks, Zacks Investment Management, Mitch's Mailbox: Answering Your Portfolio Questions, September 5, 2024.
The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.
Comments