Election years often bring heightened uncertainty for investors. With discussions about policy changes, economic shifts, and market reactions dominating the news, many investors feel anxious about how these factors could impact their wealth. When navigating uncertain waters, we find it helpful to focus on informed, pragmatic approaches. We believe that with the right perspective and strategy, clients can confidently manage their wealth, no matter the political landscape.
While each election cycle is unique, our clients’ concerns during these periods generally fall into two categories: uncertainty around policy changes and uncertainty about market volatility.
Understanding Potential Policy Changes
An election year often brings proposed policy shifts that can affect various aspects of wealth management, including tax obligations, investment opportunities, and estate planning. Our goal is to stay informed and analyze these changes to help our clients prepare for different scenarios. Understanding the differences between the candidates’ positions is crucial for making informed decisions. For the 2024 election, we can make some general assumptions based on what each candidate has discussed in their campaigns.[i] We’ve outlined some of those assumptions below, along with how an investor might choose to address each policy change:
A Democratic administration is expected to:
- Increase corporate tax rates to fund public programs: Investors may want to consider diversifying investments into sectors that might be less affected by higher corporate taxes, such as utilities, healthcare, or consumer staples, which tend to perform more consistently during economic shifts. If you own a business, consider exploring strategies to manage potential increases in operating costs, such as cost-cutting measures or tax-efficient reinvestments to minimize the impact of higher tax liabilities.
- Increase capital gains tax for high-income earners: In response to changes in tax rates, Investors can review their portfolios and consider realizing gains before any potential tax increase takes effect. This might mean strategically selling some appreciated assets now to lock in lower tax rates. Additionally, a common strategy of tax-loss harvesting—selling investments that have declined in value to offset gains, thereby reducing the overall capital gains tax burden, is another strategic response that can benefit certain investors.
- Introduce new tax credits for clean energy investments: Investors could benefit from exploring opportunities in the clean energy sector, such as stocks, ETFs, or funds focusing on solar, wind, or electric vehicle technology. If applicable, taking advantage of available tax credits by investing in clean energy for homes or businesses, such as installing solar panels or upgrading to energy-efficient appliances, can also help lower your tax burden.
A Republican administration is expected to:
- Lower the top income tax rate to stimulate economic growth: Investors may pursue investments in growth-oriented sectors like technology, finance, or industrials that could benefit from lower income tax rates and increased corporate profitability. Adjustments to tax-advantaged accounts, such as IRAs and 401(k)s, can optimize contributions and withdrawals under the expected lower tax rates.
- Expand tax breaks for small businesses: For small business owners, we could suggest strategies to reinvest tax savings into business expansion, such as hiring more staff, increasing marketing efforts, or upgrading equipment. Small business owners might explore retirement savings plans like SEP IRAs or Solo 401(k)s, which can offer additional tax benefits and help maximize contributions.
- Announce proposals to simplify the tax code to reduce compliance burdens: Aligning financial portfolios and business operations with a simplified tax structure can lead to efficient compliance and reduced administrative costs. With fewer tax complexities, tax-efficient investment options like municipal bonds or tax-deferred accounts can help optimize portfolios.
These examples illustrate how different policies can impact investment portfolios, retirement accounts, and business operations. They also illustrate how basic good financial housekeeping can go a long way in preparing for a wide variety of future scenarios.
Examining Historical Data on Market Volatility
The fear of market volatility in an election year is understandable but may be unfounded. Contrary to popular belief, historical trends suggest that markets do not always exhibit extreme volatility during election years. Did you know that, historically, U.S. stock markets have shown moderate fluctuations leading up to an election, but these movements tend to normalize once the results are clear? This indicates that while short-term volatility may occur, it doesn’t necessarily lead to long-term instability.[ii]
In fact, market performance is often more closely tied to underlying economic fundamentals than election outcomes, suggesting that investors should focus on broader economic indicators rather than political headlines. Post-election periods typically see markets stabilize as investors adjust to the new policy landscape, highlighting the importance of maintaining a long-term perspective rather than reacting to short-term market movements.[iii]
We find that the key to maintaining that perspective is sticking to the basics and doing them well. Those strategies include:
- Avoiding Information Bias: Information bias refers to the tendency to give undue weight to certain pieces of information, especially when it’s incomplete or misleading. According to Investopedia, information bias can lead investors to make hasty decisions based on sensationalized news or short-term market trends. By focusing on reliable, comprehensive data, we help our clients avoid the pitfalls of reacting to incomplete information.
- Diversification and Risk Management: A well-diversified portfolio is essential for managing risk, especially during times of uncertainty. Diversification means spreading investments across different asset classes (e.g., stocks, bonds, real estate) to minimize exposure to any single type of risk. This strategy helps to protect portfolios from sharp declines that may occur due to political or economic shifts. Our team continuously evaluates market conditions to ensure that our clients’ portfolios remain balanced and aligned with their long-term objectives.
- Long-Term Focus: We emphasize the importance of maintaining a long-term focus. Temporary market fluctuations should not derail a well-thought-out strategy. Historically, markets have shown resilience and the ability to recover from short-term disruptions. By encouraging clients to stay committed to their financial plans, we help them weather the ups and downs that may come with election cycles.
There Will Always Be Uncertainty
As we approach the 2024 election, we encourage our clients to stay informed and focused on their long-term goals. By focusing on sound principles like diversification, staying informed, and maintaining a long-term outlook, we help clients navigate the complexities of election-year investing. Our firm is here to help every step of the way, providing expert advice, data-driven insights, and a steady hand during uncertain times. By working together, we can ensure that your wealth is managed effectively, no matter what changes the election may bring.
Still concerned? Reach out to your advisor today.
[i] https://taxfoundation.org/research/federal-tax/2024-tax-plans/
[ii] https://insight.factset.com/do-stock-and-bond-markets-become-more-volatile-around-us-presidential-elections
[iii] https://www.morganstanley.com/ideas/us-election-2024-stock-market-implications