Every 4 years, we take a look at how the presidential and congressional elections may impact your personal finances: taxes, investments, health care, retirement, and more. Our analysis is intended to be non-partisan and focused on helping you plan today for potential scenarios and outcomes.
- The results of the 2020 elections may not be final for weeks or months.
- Which party controls the Senate will be key to the President’s ability to achieve his agenda.
- Economic growth drives investment outcomes more than politics.
- There are steps you can consider if you’re concerned about rising taxes.
- If you have a solid financial plan, stick with it. If you need one, we can help.
After a long and contentious 2020 election, President-elect Joe Biden has hit the 270 electoral vote count needed to win the presidency. But with the Senate still undecided and numerous recounts, runoffs, and legal challenges underway, it’s not over yet. Sorting all that out may take weeks or months. Indeed, the Georgia runoffs are not until January 5. Who wins there will determine which party controls the Senate, which will have a significant impact on Biden’s ability to achieve his legislative agenda.
What to do in the face of this uncertainty? Here are 6 helpful insights from Fidelity pros to consider.
1. Longer term, the economy drives the markets. While the uncertainty over election results can unsettle markets in the short term, Jurrien Timmer, Fidelity’s director of global macro, says the pace of the economic recovery and the course of the coronavirus pandemic are likely to be more important to stock market returns than who controls the White House and Congress. Fidelity believes we are in the early stages of recovery from recession, and fiscal and monetary stimulus would help keep that going.
2. Big government spending and low interest rates are likely to continue. Such a fiscal and monetary policy cocktail may well be the most important driver for the economy, and, in turn, asset prices in 2021 and beyond, says Timmer. In this environment, stocks have outperformed bonds, and growth stocks have outpaced value stocks. On the borrowing front, you might want to consider refinancing your home if you can capture lower rates. If you’re saving for the long-term, there are higher yielding options than money market funds to consider as well.
3. Tax hikes haven’t historically tanked stocks. In fact, in the 13 previous instances of tax increases since 1950, the S&P 500 has shown higher average returns, and higher odds of an advance,1 according to Fidelity's sector strategist Denise Chisholm. That’s likely because tax hikes often coincide with periods of rising government spending, which tends to stimulate the economy. (For more, read Viewpoints: History lessons from past tax hikes)
4. There are steps you can consider to help mitigate the risk of rising taxes on your bottom line. Federal tax policy could change a lot or a little—or not at all. So it’s important not to let potential policy changes cause you to make investment decisions that might not be good for you in the long term. But if you are concerned about rising tax rates, there are a few steps to consider taking this year, which may be good moves regardless of who wins, but even better if taxes rise next year. Among those to discuss with a financial advisor:
5. On the investment front, potential changes in regulation could lead to opportunities for active investors. A Biden administration would likely reverse Trump era policies and tighten regulation on such industries as fossil fuels, health care, defense, domestic banks, and financial services companies. For example, Biden might take executive action to rejoin the Paris agreement on climate change, ban oil and gas permits on public lands, and to strengthen the Affordable Care Act. Industries that could benefit from a Democratic administration could include utilities, renewable energy, managed care providers, and infrastructure builders.
6. Don’t let emotions cloud your decision-making. It’s easy to let emotions about elections cloud your financial decision-making. But acting when you're fearful or anxious can lead to results that can undermine your long-term investing success. Some antidotes include:
The bottom line
While elections matter, they have less impact on the markets and investments than other factors, like the pace of the economic recovery, which is now in the early part of the cycle when markets have tended to climb a wall of worry. Successful investors tune out the noise that can unsettle markets in the short term and invest for the long term.
To a large degree, the way you invest and plan for your goals are more important in the long run than the party controlling the White House or Congress. So what should you do? Make a plan, stick with it, and rebalance investments when you need to. If you need help, contact us.