The Election’s Impact on Your Portfolio
Posted December 19, 2016
By now, the electoral college has made ups its mind as to who is going to serve as the next President. But what can we look forward to, from an investment and tax standpoint, with a Trump presidency? How will the election affect their portfolio and future net worth?
Let’s look at the least predictable factor. An analysis of historical market returns under different administrations gives a frustratingly incomplete picture. When a President comes into office and immediately enjoys a few boom years, is that due to his great policies or the policies of his predecessor? Similarly, when a President enters office in the middle of a recession (think Obama in 2009 and George W. Bush in 2001), can we attribute the weak market performance to any policies he hasn’t had a chance to enact?
The cliches that Republicans are better for markets than Democrats is hard to support based on the raw statistics. As you can see from the chart, Richard Nixon and George W. Bush are the only presidents who presided over a net loss in the markets, while Bill Clinton and Barak Obama are second and third behind Gerald Ford as the presidents associated with the highest total gains. The record is too mixed, and too complicated, to make predictions based simply on the party that wins the white house. (See chart)
But what about something more concrete, like tax policy or budget deficits? Surely here we can read the tea leaves about the future.
Once again, the historical record can be misleading. President Reagan, known as a great tax cutter, lowered taxes with the 1981 tax act and promptly raised them again with new measures a year later. Democratic President Bill Clinton’s administration presided over the only budget surpluses of the modern era, while Republican President George Bush and Democratic President Barack Obama together, added more to the deficit than all previous presidents.
The most reliable clue we have about the fiscal and investment impact of a Trump presidency is the actual proposals by the candidate—but even here we have to proceed with caution.
A President Trump would be more likely to get his wishes working with a Republican Senate and House, but what, exactly, these would be is far less certain. You can expect a President Trump to make an effort to cut taxes by reducing the ordinary income tax brackets to 12% (up to $75,000 for joint filers), 25% ($75,000 to $225,000) and 33% (above $225,000). The standard deduction would double, but itemized deductions would be capped at $100,000 for single filers ($200,000 for joint filers). Corporate tax rates would be reduced from a maximum of 35% to a maximum of 15%. Federal estate and gift taxes would be eliminated, but the step-up in basis would also be eliminated for estates over $10 million.
The Tax Foundation estimates that Trump’s proposals would reduce tax revenues by between $4.4 trillion and $5.9 trillion over the next decade, but the Tax Foundation believes they would add 6.9% to GDP.
Turning back to the markets, the investment herd prefers certainty and status quo to uncertainty and rapid change. The bottom line may be: prepare for the possibility of a lower-tax environment under a President Trump. The reality is that America will still represent the most dynamic economy in the world, and whoever runs the White House is unlikely to change that.