What the Election Means for the Stock Market (and What It Doesn’t)
Tuesday, November 4 was Election Day.
For some of you, the prospect might have been exciting. But for a lot of Americans, the day inspires a bizarre mixture of gratitude to be part of the process and anxiety over what the future might hold. And some of you may be wondering, what does the election mean for the stock market?
I’m glad you asked. The short answer is that elections don’t often hold as much sway over the stock market as some might fear. That’s good news overall and will hopefully help alleviate some of the angst you may be feeling about the election and election results.
Political Parties and The Markets
One running theme of the Republican party is that Republicans are good for the stock market. But is that really true?
According to Jeffrey Kleintop from Charles Schwab (2020), the state of the economy and of the stock market before the election has a greater impact than the election itself, historically speaking. However, a total changeover from mixed parties in Congress and the White House to a same party legislative and executive branch may usher in positive market changing events like fiscal stimulus, but it may also pave the way for market changes like higher taxes.
Jeffrey Kleinhop from Charles Schwab (2020) says, “It’s very common for a president to take credit for, and sometimes get blamed for, the strength or weakness of the economy and the performance of the stock market while he was in office. But I do believe the dramatic gains during things like the Roosevelt and Obama presidencies had as much to do with how terrible things were when they actually took office as they did with the policies they implemented.”
Below are some interesting charts to show stock market activity under different presidents:
Dimensional.com also released a short video to highlight presidential influence on the stock market.
What Happens in a Contested Election?
Most people don’t like uncertainty, and the stock market is no different. So, in times of great uncertainty, like a contested election, what has the stock market historically done?
The most recent example of a contested election occurred in 2000. You probably remember Bush, Gore, and the hanging chads in Florida. According to Mike Townsend on Schwab’s WashingtonWise Investor podcast (2020), “In 2000, the S&P 500 underperformed both before and after the election, dropped about 6.2% in the seven months prior, and then another 5.6% in the week immediately following the election. But even more fascinating was that there was a second selloff of about 7.8% in the week following the final Supreme Court ruling in mid-December. So even once the results were finalized, the market still wasn’t happy.”
So, the good news, based upon history, is that the fluctuation of the stock market due to contested elections is common and usually short-lived.
What A Biden Presidency Might That Mean For Your Taxes?
Since it appears Biden has won the presidency, you may want to consider some tax implications and strategies before year-end.
As Michael Kitces (2020) explains, “...Vice President Biden has proposed a (relatively?) modest, but immediate, increase of the top ordinary income tax bracket from the current top rate of 37%, to the top pre-Tax Cuts and Jobs Act rate of 39.6%.”
Taxpayers whose income exceeds $1 million may find long-term capital gains and qualified dividends taxed at ordinary income rates. So, when Biden takes office, these taxpayers may benefit from making changes before year-end to reduce their tax burden.
Michael Kitces (2020) also notes that the 1031 Exchange, which allows a ‘swap’ of tangible property held for investment with similar properties may go away and thus trigger a tax bill when it otherwise wouldn’t.
Biden also seeks to change or eliminate the “step-up” in basis on inheritance, but this part of his plan may be his most difficult to implement.
What Does This All Mean For You?
While elections themselves can be a source of internal and external strife for a variety of reasons, you can hold fast to the notion that, for the most part and historically speaking, the stock market will continue to do what it has been doing, with minor fluctuations.
The election of a president and congressional members doesn’t seem to have a lasting, long-term singular effect on the stock market. As with all things stock market related, a variety of factors contribute to its performance.
But rest assured, in the middle of an election or on any other Tuesday of the year, Ella Financial Advising is here and happy to walk you through your financial landscape. Please feel free to reach out to us at any time!
Kleintop, J. (2020, October 12). Global Impact of a “Blue Wave” Election Outcome. Schwab. https://www.schwab.com/resource-center/insights/content/global-impact-blue-wave-election-outcome
Schwab (Producer). (2020, October 29). Washington Wise [Audio podcast]. https://www.schwab.com/resource-center/insights/content/washingtonwise-investor-episode-29
Kitces, M. (2020, September 30). The Biden Tax Plan: Proposed Changes And Year-End Planning Opportunities. Kitces. https://www.kitces.com/blog/biden-tax-plan-cuts-democrat-proposal-capital-gains-396-increase-estate-exemption-retirement-credit/
Until next time,