Broker Check

Presidential Election and Your Money

| October 05, 2016

This almost surreal upcoming election has completely dominated the news cycle along with dinner table conversations across the country. So we thought writing another update on the Fed and market valuations might just fall on deaf ears.  To be fair, the Fed certainly provided enough entertainment in their latest decisions / commentary to warrant further discussion! Still, we are deciding instead to focus on the upcoming election in terms of what it might mean for your money – both from a short (call it the next 1-4 years) and long-term perspective.

Our discussion here will focus on what we believe to be the most important political issues as they pertain to your money. We will note what each of the candidates have stated where appropriate – realizing full well that their intentions and their words are likely not one in the same. And you can rest assured that we will not be making dramatic and politically motivated statements such as “if Donald Trump wins, the market will drop 50%”. Yes, a very well-known media / business personality actually said that on national television not too long ago. His last name is synonymous with a fine cigar.

We realize that any discussion surrounding a presidential election is often met with anger from readers feeling offended that we are “in the tank” for one candidate or another. Our discussion here is about our beliefs on the important issues surrounding the political landscape and your money. Any bias toward one candidate or the other is strictly the result of their own stated positions on any of the topics we cover. We will not address the candidates’ personalities or integrity (or lack thereof). As such – while you can certainly agree or disagree with our positions on the issues – we promise you that none of these awe-inspiring candidates have even remotely helped form our own opinions on the following topics.

Our Mothers always told us never to speak of money, politics or religion. Well Mom, 1 out of 3 ain’t bad….

It’s the Economy Stupid

Put us firmly in the camp that the current state of the jobs market and economy is less than perfect to say the least. The economy is growing at an anemic pace, and the unemployment rate is more than misleading when diving into the types of jobs being created as well as the numbers who have dropped out of the workforce. It makes sense that – when combined with stock market performance – the divide between the “haves and the have nots” is growing at an unsustainable rate in terms of the long-term health of the economy.

At the risk of ignoring many other important issues, we will focus on what we believe to be the three areas that should be addressed most urgently – globalization, taxation and regulation. Our manufacturing has largely moved overseas, and this has an obvious effect on both jobs as well as our overall economy. The tax and regulatory environment in the US – coupled with the cheaper labor offered abroad – have created a perfect storm for moving jobs overseas. In our opinion, this has to be addressed and fast.

That said, it’s not as easy a solution as our politicians would have us believe. Penalizing companies or countries for moving jobs overseas will lead to higher prices for all consumers here – which in turn hurts the economy in the form of less disposable income. Tax reduction becomes increasingly difficult because of our national spending / debt – topics so important they will warrant their own discussion below. And let’s not forget a fact for some reason largely ignored by the media – now billion dollar campaigns financed by large corporate donations. You are not going to get a group of politicians to agree on legislation designed to help the public while hurting the bottom lines of large business, when that same large business is funding the politicians’ campaigns. It’s a major problem – one which Trump addresses but we wish he would with much greater frequency in order to bring more attention to it.

The Certainties of Life: Death, Taxes……and Obamacare?

Let’s not mince words here – in the United States, we do not save enough money. Simply look at the countless studies done on the average retirement savings of our population. It makes sense, assuming we are using our government as a role model! And yes, it is probably true when we are labeled as a generation of “instant gratification” by our parents or grandparents in terms of how we spend our money. At the same time, we don’t think that tells the whole story.

Take a moment to think about all of the taxes that you pay. Federal income, state income, social security, medicare, real estate, sales taxes, capital gains and then finish it off with an estate tax for some. I’m sure we have omitted a few others. Now add to that your total health care costs – premiums, deductibles, supplements, co-pays and those items ultimately not covered. Over the past 3 years, my family is averaging 25-30k per year on health care alone. Got kids getting ready for college? That will probably set you back a couple of hundred thousand each.

What is the common theme of all of the above-listed expenses? Since the passage of the ironically-titled “Affordable Care Act”, the commonality is that our politicians have their hand in all of them. Of course, they directly determine how much of what you earn goes to taxes. And as they got involved with your healthcare (through Obamacare) and college education (through their loan programs), your costs have gone through the roof and are continuing to do so.

Most of us agree that these expenses ultimately hurt the overall economy. In fact, both candidates have strong opinions on all three. Trump wants to lower taxes for everyone…..”big league”. Clinton wants to lower taxes for the “working class” (still waiting on definition) while raising taxes on the “rich”. Trump wants to abolish Obamacare and replace it with something that also remains mostly undefined. Clinton wants to make your college education free – as long as you are not some variation of “rich” already. All of these sound great – but there is one small problem…….

The National Debt

For those of us living in Chicago, we have a front-row seat to what the country as a whole is up against. At some point, when you make ill-advised promises in order to get elected – while ignoring the long-term consequences – it catches up with you. Our federal government does admittedly have a printing press at its disposal that the states do not have, but it remains a dangerous proposition to assume the rest of the world will comply with our monetary and fiscal policies forever.

If we assume (which we do) that the only possible way to truly grow the economy from here is to reduce the burden of taxes, regulation and other government related expenses on the private sector, we are still starting from a point of weakness – in the form of 19 or 20 trillion dollars of debt. Lowering taxes for everyone works great for growing the economy – but you better have enough growth to replace the lost tax revenue. Raising taxes on the “rich” while lowering them for everyone else doesn’t realistically come even close to reducing the problem – especially when you add the costs of government sponsored health care and now college education. Both candidates rightfully acknowledge the need for massive spending on infrastructure for the country. But guess what? Someone has to pay for it.

We don’t know whether or not we have reached the fiscal point of no return. If we haven’t, it’s getting awfully close. Politicians need to begin working together for the good of the people rather than the good of their long-term political careers. They need to acknowledge and communicate the long-term problems we face in an honest and responsible manner. There needs to be tax reform other than blindly lowering taxes on everyone or only taxing the rich. And we better get our expenses under control, regardless of the political consequence. We haven’t even mentioned entitlement spending in this country – that would add another 5 pages to this already-too-long commentary.

We are certainly not suggesting we have a magical or easy solution. But that’s what we elect these yahoos for in the first place, right?

The Election, The Fed and the Stock Market

Given the fact that we are hired first and foremost to help plan your financial future and manage your investments, it would make sense for us to put all of this in the context of what you might see on your monthly statements following this election. This is the one section we will specifically discuss the two major candidates, as we are confronted with concerns all the time about what might happen if one or the other is elected. It is important to note that before having an intelligent discussion about the topic, one must decide whether or not they believe the Fed is a political body – or truly independent as they claim to be. We happen to have serious doubts on their claims based solely on their own words and actions.

Let’s start with The Donald. We agree that the market would likely react negatively to the uncertainty created by having such a both non-political and non-politically correct candidate elected as the leader of the free world - at least initially. Of course, everyone told us that the uncertainty around the “Brexit” vote would cause major market disruptions. It did….for about 2 days. Trump is not “paid for” by big business the way most recent candidates for President (on both sides) have been. Furthermore, he is against many of the trade deals that proved so profitable for these businesses. Both of these assertions pose threats to stock prices – particularly stocks of those industries most directly affected. And assuming that the Fed is in fact politically motivated, we believe they would feel much more emboldened to raise interest rates quicker following a Trump victory, especially given his rhetoric regarding their actions (or lack thereof). To us, Fed action remains the biggest short-term threat to stocks, bonds and the overall economy.

Hillary Clinton is almost the polar opposite on every front. She runs a billion dollar campaign funded in no small part by big business – therefor having a greater incentive to ultimately protect their bottom lines through trade deals, tax code, etc. That would obviously be a positive for their stock prices as well. A Clinton victory would likely result in less perceived uncertainty by the markets, quite possibly leading to an initial rally should she be elected. And she has had nothing but glowing reviews of the Fed and their actions – so we think the Fed would remain much more attentive to the stock market and how it might reflect on her presidency. If true, the free-money stock market party is much more likely to keep on rocking for as long as it can last.

If we are correct in our analysis above, we believe that a Hillary victory would – at least initially – be the comfortable outcome for financial markets. Yet there remains the question of just how long we can keep kicking this can down the road. It is our strong belief that the continued focus on the next quarterly earnings report or next election cycle – rather than the long-term health of any company or our economy overall – pushes us closer and closer to completely falling off of the proverbial financial cliff.

It is our sincere hope that voters in this country – along with the politicians they elect – will begin to take a longer term approach to decision-making. Regardless of who wins any election, we will have to decide to work together to come up with long-term solutions to serious problems that everyone knows to exist. We must be willing to accept short-term discomfort in return for long-term sustainability. This applies to us as citizens and investors, as well as to our politicians and their career ambitions. It also applies to our media who long ago replaced reporting important information of the day with disseminating biased opinions of anchors or the networks who employ them. And the Fed should stop worrying about the stock market and how it might affect the politicians by whom they were appointed.

We believe that all of these things can happen, yet wish we had more confidence that they will.

As always – to all of our clients – we thank you for the trust and confidence you have placed in us at Round Hill Wealth Management.  

               

Douglas Brymer                                                                             David Swanson

President & Wealth Advisor                                                        Principal & Wealth Advisor  

  

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor.  HighPoint Advisor Group, LLC and Round Hill Wealth Management are separate entities from LPL Financial.