5 Financial Impacts of the Democrat Blue Wave

by | Jan 27, 2021

Democrats swept the 2020 elections, which means investors are evaluating how that could impact their portfolios, taxes, and overall economic recovery. Forecasts are mixed, but investors are encouraged to keep a long-term focus.

The elections dominated headlines for several months leading up to November (and then through January), with election season culminating with a Democratic sweep of the House of Representatives, the Senate, and the Presidency.

Regardless of your political affiliation, it is only prudent to evaluate how the all-Democrat government agenda might affect you and your financial situation. Let’s look at five key themes resulting from the “Blue Wave.”

1. How Has the Stock Market Performed Under All-Dem Control?

As an investor, your first concern about the change in government might be your portfolio. However, historical data shows us that the stock market has done well in all political scenarios, and unified governments have actually produced the highest overall returns.

According to an article published in Forbes, CFRA Research found that a unified Democrat government resulted in S&P 500 returns of 9.8% over 22 years, compared to 12.9% over 8 years during all Republican control.

However, the average returns of a unified government still exceed the returns we’ve seen from only a unified congress (7.4% over 32 years) and the returns from a split congress (8.6% over 14 years).

Now inconsequential, the best scenario, historically speaking, has been a split congress with a Democratic President, which has resulted in a 13.6% return (albeit just over a period of 4 years).

Although past performance is not a guarantee of future results, historical data suggests there is no need to be overly concerned about stock returns with a unified Democratic government.

2. Potential Tax Increases

Taxes are likely to go up, but it’s also important to understand where taxes might be going up from. The Tax Cuts and Jobs Act of 2017 have allowed tax rates for individuals and corporations to be lower than they have been for quite some time. An increase from where we’re at today may leave us in a similar place to what we saw prior to the TCJA of 2017.

Also, some believe any potential tax increases would not happen right away. This is mainly due to the COVID-19 pandemic and recovery taking precedence over most other initiatives. Additionally, it is expected by some to see only slight increases to the current tax code as opposed to revolutionary increases across the board. However, all estimates are simply that at this point.

Some key components of Joe Biden’s tax plan include:

  • An increase in the top tier tax bracket back to 39.6% for those earning $400,000 or more
  • An increase in payroll taxes for those making over $400,000
  • Eliminating the qualified business income deduction for anyone with income more than $400,000
  • Replacing IRA and 401(k) income tax deductions with a flat credit (benefitting the less wealthy)
  • Making capital gains equal to ordinary income rates for those with income in excess of $1 million
  • Eliminating the step-up in basis for capital assets, which makes death a taxable event for beneficiaries inheriting land, assets, etc.
  • Reducing the estate tax exemption limit down to $3-5 million (currently the limit is $11.7 million per individual)

3. The Dollar Could Weaken Due to Deficit Spending

With COVID-19 driving up government deficit spending, the dollar is likely to face downward pressure. In addition, Joe Biden has also mentioned priorities like building infrastructure and easing trade tensions, both of which could cause the dollar to weaken.

A weaker dollar means international investments could become more attractive, but time will tell.

4. Inflation is Likely to Return

After the Georgia runoffs, the 10-year treasury note increased by 24.10% from January 4th through January 12th on the premise that more economic stimulus is expected. Looking back further, from July 31st to January 11th, the 10-year treasury rose over 111%.

However, rates dove much lower in 2020 than most expected, with the 10-year treasury ending the year under 1%. Bond investors need to be very careful about how to proceed, as rising interest rates will have a negative effect on bond prices.

5. Growth Forecasts Still Looking Good, Despite Inflation

If you’ve followed our blog at all, you know we are not fans of forecasts. But, for what it’s worth, companies like JPMorgan Chase and Goldman Sachs are predicting GDP of 5.3% to 6% in 2021.

Does this mean it will be smooth sailing in 2021? Not necessarily. And, there can be a big difference between GDP and how your 401(k) performs (i.e. what happened in 2020).

Bottom Line

Despite what the analysts and so-called experts have to say, all five of these factors are unknowns. We also can’t forget the infinite number of other events, good and bad, that may reveal themselves in 2021.

When talking about the stock market, 2021 sounds just about like any other year we have ever had. And, if 2020 taught us anything, it is that we should expect the unexpected. Does that mean bury all of your cash in the backyard? No, as that isn’t prudent either.

But, what is prudent is to make the best decisions with the information you have. If you don’t know what part of the market might perform best, perhaps it’s best to diversify. If you’re unsure on whether to contribute to a Traditional or Roth 401(k), perhaps do a blend. Hedge your risks and accept the outcomes. Commit to controlling what you can control, namely, your attitude, outlook, and personal planning.

 

Sources

1. Forbes.comhttps://www.forbes.com/sites/sergeiklebnikov/2021/01/06/we-looked-at-how-the-stock-market-might-perform-if-democrats-sweep-georgia-and-the-results-arent-what-you-think/
2. Investopedia.comhttps://www.investopedia.com/explaining-biden-s-tax-plan-5080766
3. Business Insiderhttps://markets.businessinsider.com/news/stocks/us-gdp-rise-forecast-biden-stimulus-plan-goldman-2021-1-1029976866# 

Joe Allaria, CFP®

Joe Allaria, CFP®

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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