A Post-Election Note
I had a birthday during the week of the recent presidential election, so as an indulgence, I started writing this post to express my personal view on the election results. It was a bit of a whirlwind, with all but a handful of races decided within a day or two. Full disclosure: I voted for Kamala Harris, the second time I voted for a highly-qualified woman for president, the second time my candidate lost. This time I was less surprised by the result.
My views on politics and policy have evolved over the years, based on my exposure to finance, tax and economics, to the private, public and not-for-profit sectors, and no question, based on my personal circumstances. We all reach our own conclusions based on similar metrics, and one of the things that tends to get lost is that widely divergent views can both be valid. Here I offer my perspective on the impact on markets and the economy. More on other areas likely to be changed in 2025 and beyond in a future post.
MARKETS
In the weeks just after the election, the US stock market has been reflecting what’s been called the “Trump trade,” meaning that a lighter regulatory environment and lower taxes (at least on corporations) is expected to allow companies to reap greater profits. Most major stock indices are up. The bond market, interestingly, tends to take a long-term view, and it was down after the election, even after the Fed’s reduction in the Fed Funds rate in November. Many of the economic proposals in play are expected to be inflationary, and bonds don’t like inflation.
The stock market is a nervous nelly with a notoriously short attention span. If what you care about is short-term profits, then the new administration may do your portfolio a favor. However, if you want solid long-term earnings, as well as economic underpinnings for long-term growth, my view is pretty dark. The very rich will continue to reap great profits, at the expense of everyone else. Some of you have achieved great wealth, and yet this “very rich” category does not include you. Oligarchs only.
This matters because large concentrations of wealth tend to be destabilizing, and some of the broad proposals for changes from the incoming administration could cement some of this skewed structure for decades.
Bigger issues are the macro ones, such as deficit spending, the cost of debt and how that can crowd out revenue for Social Security, Medicare and any other social support, and global ones (trade, conflict) that can be inflation-causing and destabilize markets (like agricultural markets) here and overseas. Personally, I also see socio-economic issues that could impact the workforce (making it harder for women to stay employed, for immigrants to stay employed, for everyone to plan the families they want), making future growth more difficult.
WHAT TO DO
There has been a lot of chatter in my world about how you don’t change your investment philosophy because of an election, that the stock market is agnostic, that this election is just like any other election. That is where I stand apart from my peers, because I don’t believe the plans from the incoming administration will keep the US on a steady path of continued expansion and innovation, that some of the reported plans for change will in fact undermine what is needed for a strong economy, like institutions that regulate markets and markets players, that protect workers and property. That said, there are a few things I’m recommending with regard to portfolios, and these things are not that different from what you might expect. Spoiler: I’m not recommending to invest heavily in crypto or to short fluoride. Here are a few recommendations:
• While markets are up, take profits and rebalance your holdings.
• If you are in distribution mode (relying on your investments to create a retirement income stream), build in some resilience in your holdings for the next few years. In my firm, we typically carve out three to seven years of income requirements and invest this in cash equivalents and other low-volatility holdings to insulate against market declines.
• Shore up your cash reserves. This means your Emergency Fund (usually six months of expenses for a household, up to 12 months if your household has a single breadwinner). In two particular cases, this might be especially important:
• If you work in the federal government, or for an organization connected with federal support of some kind, take this to heart; you might be out of a job in the next year, and might be looking for your next gig during a recession. Bolster your cash reserves and update your resume.
• Consider whether you’ll need bail money. And someone to bail you out if you end up detained after a protest [1].
INFLATION
A big part of the election results were an outcome of the economy, and that means groceries and gasoline, not an investment portfolio. You might disagree with the election results, but the folks who voted in the new administration are not wrong about this part. The vast majority of Americans are working hard and still struggling.
Groceries and gas are price insensitive goods, meaning there’s really no way to not eat and so avoid inflated prices. You’ve got to buy food. Shoes. Diapers. And to do that, you’ve got to get to work, and not everyone has access to good public transportation. Add gas to the list of price insensitive goods. If you live outside a major urban area (or live in LA), good luck not using a car.
If we had treated the response to Covid-19 as a war against a disease, we might have been able to implement price controls that would have stabilized prices. After the initial supply shocks of the immediate post-pandemic period passed, industry was right back to making its normal profits. But the elevated prices charged to cover temporarily higher supply costs (plus a normal profit, of course) persisted. Even as the inflation rate (the increase in price levels from one period to the next) has declined, and is close to the target 2%, next year’s 2% increase in inflation is on top of already high prices. (This is the power of compounding in its worse, upside-down form.) Government intervention during the pandemic had saved the asseTs of huge US multinationals, so you could say it would be fair that those same companies wouldn’t be allowed to make EVEN GREATER profits in a pandemic than they would in normal times. Counter-factual analysis aside, we are where we are. Alas.
With a laissez faire approach to regulation (“I’ll let them do whatever they want” – said about Russia in Ukraine, but representative of letting things take their own course), don’t expect lower prices. With the proposed tariffs, expect even higher prices.
TAXES
Corporate taxes and personal taxes that tend to hit Ultra High Net Worth (UHNW) investors are expected to be lowered [2]. The little guy (and the not-so-little guys, too) will end up paying more in taxes, and getting less: the tax policy of the first Trump administration in part created the deficits we face today; those deficits haven’t been helped by higher interest rates. Expect massively higher deficits, which mean higher interest costs. Which are paid for with taxes.
The changing federal administration puts us in a hyper-dynamic situation right now with regard to taxes. It’s hard to know how things will shake out regarding tax deductions, credits, and extension of the current tax regime, passed as the Tax Cuts and Jobs Act in 2017 (TCJA). It’s likely TCJA will be extended for a shorter period of time than its initial 10 years. Given how tax bills are required to fit into the budget process (that’s why the TCJA was structured to expire after 10 years), it might be more like a four- or five- or six-year extension.
It’s probable that the state and local tax (SALT) deduction that currently is limited to $10,000 on your tax return will not be restored to the full amount of these taxes that you actually pay. This restriction impacted taxpayers in “blue” states like California and New York massively. The same people who fight against “double-taxation” of investments are the same ones who promoted the SALT restrictions, meaning state tax payers are paying twice on the same income, first to the state, then to the feds. Retaliation against Democratic jurisdictions is likely to show up in other forms in the future. By mid-January we should know more.
WHAT TO DO
For tax planning, I’m looking at many of the same strategies that have opportunities in the last few years. With the expected extension of the TCJA tax cuts, we may have a somewhat longer period to implement these strategies. They include:
• Roth conversions: Using periods of low taxable income (as is often the case in the first few years of retirement) or when you will have “room” at a particular tax rate before bumping up into the next bracket, we convert taxable retirement savings (from 401ks and IRAs) to tax-free savings by converting a select amount to a Roth IRA. You’ll pay tax today on any taxable amount of the conversion, but then that savings grows tax-free. In addition, you are not required to take distributions from Roth IRAs after you convert (meaning you control any distribution) and your heirs who inherit any balances in Roth IRAs also inherit the Roth account’s tax-free status. A great estate planning benefit.
• Estate and trust: With the estate and gift tax exemptions expected to remain very high (the 2024 estate tax exemption is currently $13.61 million per person), their anticipated extension means you will likely have time beyond 2025 to fully utilize these exemptions in planning.
• Charitable planning: While charitable giving has tax benefits, it’s most effective when the donor has a connection with the cause or the organization that serves it. With an emphasis on eliminating government support for things like the arts, school lunch programs and health care assistance for the lowest-income households, your charitable contributions may be needed more than ever. However, the recent passage of House Bill HR 9495 means that not-for-profits which may not be in favor with the new administration could face repeal of their tax-exempt status. [3] While the bill *might* have been well-intentioned, it can easily be subject to grave abuse. Check in with the organizations you support.
OTHER STUFF
There are other worries, such as the fate of institutions like the Federal Reserve (and its independence), the justice system (and its increasing skew away from business intervention but towards interference in the personal lives of citizens), the foreign service (the “other army” that keeps us out of wars and other armed conflicts) and the rest of the federal government in general. Regulation of air travel, clean water, safe food — those niceties of modern life. The fate of democracy worldwide. Oh, and climate change. I worry about that, too. I’ll save discussion of these for another day.
KEEP ON KEEPING ON
A handful of late-night comedians and social media users got me through the first Trump administration and a pandemic. This time, I know they’ll rise to the challenge, but it feels like it will be harder to laugh when more Americans are suffering.
I’d be lying if I didn’t find the idea of fleeing the country momentarily tempting. Apparently I’m not the only one. You all know I love France. On a recent webinar about moving there (scheduled before the election [4]), this was the first question in the chat:
Craig, I feel you.
In the current moment, it’s harder to find a place to go where populism isn’t making a comeback: France, Italy, Germany have all experienced a marked nationalist shift to the right. The worldwide dilemma we also face here will get worse before it gets better. Yet there is no alternative to persevering.
This is an opportunity to put effort and energy into getting even more clear about what matters, and taking action. Take time during the holidays as we close out the year to consider what’s really important for you and yours. And if you need some inspiration as you work through it, find a comfort to keep going: Go for a walk in nature, lean into art or music, have a wonderful meal with someone you love.
I’ll be back to review some of the other issues noted above next time. Hang in there.
[1] For more on bail bond options: https://www.thebailboys.com/paying-bail-bonds-with-credit-or-debit-cards/ Accessed 11/23/24.
[2] FINRA defines “ultra-high net worth” as individuals with $30 million or more in net worth; a “high net worth” individual is someone with $1 million or more in investable assets. Henley & Partners reports that there were 5.5 million US individuals in the HNW category at the end of 2023. https://en.wikipedia.org/wiki/High-net-worth_individual.
[3] https://www.theguardian.com/us-news/2024/nov/21/house-republicans-bill-nonprofits-terrorism. Accessed 11/24/24.
[4] I have no plans to move to France. We all have dreams.