Options for Individual Investors

The election process will have significant effects on the market.  

The Supreme Court upheld a ruling by the Pennsylvania Supreme Court to allow mail-in ballots to be counted up to 3 days after the official election day, with no clear evidence that they were postmarked on or before the election. The ruling seems likely to cause prolonged uncertainty about the outcome of the election and possibly heightened volatility in the markets for a while. This is one of many reasons that investors will need to approach this election cycle differently.

When positioning your portfolio in times of uncertainty, it is particularly important to stick to your investing principles. Regardless of the outcome, making sure your portfolio reflects your financial plan and squares up with your anticipated future needs is always a good strategy.

The Effect of a Democrat Sweep on the Markets

In the event of a Democratic Sweep, there is likely to be a positive effect on the markets. 

Fiscal policy and monetary policy have a significant impact on where the markets will go. The Democrats are likely to inject a big fiscal stimulus into the economy, which will cause the markets to respond positively. 

Biden’s Tax Policy and the Lack Of Specificity 

In the Biden proposal, household income in excess of $400 000 will be taxed at a rate of 12,4%. The Biden proposal treats your capital gains and your dividend income at the same rate as your earned income. This means a tax potentially as high as 39-40%. If you add in the medicare component and restore the 12.4% payroll tax, you will then be taxed at an effective rate of about 55%, at the federal level, on your investment income, with no special provision for long-term capital gains. Then, if you are in a high tax state like California, where the marginal rate can be as high as 13.3%, you would then be paying in excess of 68% at a marginal level, on investment income alone.

How Investors Will React to Biden’s Tax Proposals

Investors are likely to move more of their money to tax-deferred accounts. A variable annuity becomes a more attractive offer under a democratic administration: money goes into the account on an after-tax basis, you don’t pay taxes every year, and when you take it out you’re taxed as ordinary income. Annuities have become more accessible and flexible and there is likely to be a spike in the adoption of liquid annuities because of the applied tax treatment.

Corporate Income Tax

Over the past 40 years, corporate income tax has been more or less consistently dropping around the world. Competition among countries has resulted in this consistent lowering of corporate income tax. Naturally, corporations and multinationals look for the place with the most favourable taxes. The US has historically had corporate taxes slightly higher than the median for developed countries, at 35%, until the Trump administration’s massive corporate tax cuts; which put us slightly lower than the median, at 21%. 

A new administration brings the possibility of raised corporate taxes and decisions for multinationals, along with decisions for individual investors who may need to reconsider how the value of their stocks might change.