In the immediate wake of the best month for stocks in 33 years, financial advisers are scrambling to prepare their clients’ expectations and portfolios for a Biden administration that comes with a cloud of uncertainty regarding taxes and economic growth prospects.
“As a financial planner, it’s difficult because you can’t react yet,” said Michael Metzger, founder of Lifepoint Financial Design.
“What I am hearing from my clients is the unknown surrounding specific points in a Biden/Harris tax plan and how that could potentially affect the overall economy and markets through what might be left of trickle-down economics,” he added.
Without a lot of specifics, President-elect Joe Biden has talked frequently about eliminating the 2017 sweeping tax cuts and raising taxes on people earning more than $400,000 a year, but there have also been references to reducing the pre-tax credit for retirement plan contributions and dramatically lowering the threshold for estate taxes.
There is also the potential that a Biden administration would seek to raise corporate taxes, which could become a drag on economic growth.
A big part of the uncertainty can be traced to the two U.S. senate seats facing runoff elections in Georgia, which could tilt a senate majority to the Democrats, potentially giving Biden more freedom to push sweeping tax hikes.
“Clients might have to make year-end decisions with incomplete information, and it’s not as if tax increases are a slam dunk even if the Democrats win those two Georgia senate seats,” said Adam Wojtkowski, a financial adviser at Smith Salley & Associates.
“All of this uncertainty leads to difficult planning for year-end 2020,” he added. “Next year and beyond should hopefully feature multiple vaccines that get us closer to normal. The positive momentum that this provides could very likely offset any negative impact from an increase in corporate tax rates as well.”
From a pure stock market perspective, most data show that U.S. presidents typically get too much blame for down markets and too much credit for up markets.
Analysis compiled by John Bernstein, founder of Bernstein Financial Advisory, which measured stock market performance in two-year election cycles dating back to 1928 found that the political party in power was responsible for about 2% of the stock market’s total performance.
“Shifts in political control of the government can certainly present shorter-term investment opportunities,” he explained. “However, staying invested with a diversified portfolio will likely do well over a longer time horizon, and political shifts in Washington have virtually no effect on portfolio performance.”
Unfortunately, that shorter time horizon is what some advisers are dealing with.
“This is the first time I can remember in the 30 years I’ve been doing this that people are saying they don’t believe what they’re seeing in the markets, they don’t believe the election results, and they don’t trust Biden,” said Tim Holsworth, president of AHP Financial Services.
“Historically, we see people coming out of the woodwork to buy when the markets are good, but I see people who want to completely ignore the market,” he added. “I ask them to try to separate their emotions, because Wall Street is telling you things are pretty good, much better than the vast majority of us would have ever expected at this point.”
Zach Abraham, chief investment officer at Bulwark Capital Management, summed up the unprecedented environment by saying, “The stock market is really confusing a lot of people right now.”
“There is unequivocally a massive separation between the performance of financial assets and the underlying economy,” he added. “The markets started celebrating after the election because one party didn’t sweep it, there wasn’t a blue wave, and there wasn’t a Trump re-lection that would make the cities burn.”
But, going forward from here, Abraham said the financial markets are expecting mountains of government stimulus to carry the economy until it can get past the COVID-19 pandemic and back to standing on its own.
“It is structurally impossible for this economy to perform at the level of 2019 at any point in the near future and asset prices will reflect that new reality without stimulus,” he said. “It will take some bumpiness in markets to wake up the politicians, but those guys aren’t afraid of spending.”
And while some advisers are trying to help clients navigate the unknown of higher taxes, others are wondering if clients are becoming too complacent with a stock market that continues to defy gravity.
“The anxiety seems to be around taxes being raised, so conversations about Roth conversions are dominating our days, but the fact that November was the best month the markets have had since 1987 hasn’t put people off,” said Dennis Nolte, vice president of Seacoast Investment Services.
“We’re seeing reactions like, ‘get me into the market,’” he added. “People are kind of moving forward whether that’s a good thing or bad thing.”
Paul Schatz, president of Heritage Capital, is also seeing a lot of blissfully comfortable clients these days.
“Between the incredible vaccine news and the election, two major uncertainties have been removed from the equation, but if somehow Georgia goes all blue, that could create another round of angst,” he said. “One of my strongest convictions in years was that there would be a stock market bottom right before the election when the masses were fearful. Now, after a huge November, no one sees a path lower and the masses are going full bore with risk. My own worry is that no one is worried.”
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