Democratic Sweep Implications

In recent weeks and months, pundits have pontificated on the potential stock market implications for a Trump win or a Biden win, a split Congress or a Congress controlled by Democrats. Now that the elections are over, we know President-elect Joe Biden and the Democrats will have narrow control of both the House and Senate.

No one has a crystal ball and can predict what the next few years will bring, but for several reasons, I don’t think it’s likely Democrats will be able to pass a large volume of bold legislation. They don’t have large majorities in Congress—you may have seen the Senate is split evenly at 50/50, with Vice President-elect Harris able to vote with Democrats. However, close followers of politics know that because of the Senate filibuster, 60 votes are typically needed to pass most types of bills. And on top of that, there are several moderate Democratic senators from swing or red states who won’t automatically be on board with a sweeping tax overhaul, the Green New Deal, etc.

I think the stock market also believes that Democrats won’t be able to fulfil an endless wish list, based on its strong performance following the Senate runoffs in Georgia that delivered control of the upper chamber to Democrats.

What can we expect in the coming months? I think it’s likely we’ll see at least one more stimulus check for Americans, as President-elect Biden has said that’s a priority. And unsurprisingly, there will be more government spending in general. I expect Democrats to push for increased spending focused on climate change, infrastructure, healthcare, state and government aid, education, and more. But again, because of their narrow majority, there will need to be compromises along the way.

I also won’t be surprised to see the US dollar weaken as the deficit continues to rise. This means non-US stocks could be poised to outperform US stocks; US companies that do significant business abroad may also be set up to perform well. We also expect—and are already seeing—an increase in oil and gold prices, along with rising inflation projections.

While we all have different opinions on the implications of everything mentioned in this article, I’m staying focused on what it means for our clients and how we can best attempt to set them up for success in this new era. At Falcon Wealth Advisors, we’ve been preparing for months for different election scenarios, and now that we know the outcome, we believe there are and will continue to be opportunities to invest in different sectors.

Bond Yields and Taxes

We’ve talked recently about the possibility of higher bond yields. While many analysts are not predicting this, I almost think that’s a reason to expect them. Jokes aside, we’ve seen bond yields start to climb in the last few months. We’ve been in a low interest rate environment for what feels like forever, but more government and consumer spending in the future should presumably lead to interest rates eventually rising, and bond yields will increase right along with them. In recent weeks, we’ve been able to buy bonds for clients with higher yields (relatively speaking). I think this is a welcome change, especially for retirees and pre-retirees living off their savings.

Many clients are also understandably asking questions about taxes. This would be a challenging year for politicians to raise taxes, as the pandemic continues, and unemployment remains high. However, as we look to 2022 and 2023, it seems quite possible taxes will rise, in part to pay for all the stimulus money given to Americans in 2020 and 2021.

We don’t yet know how this will impact individual income tax rates—will taxes go up for everyone, or only wealthier Americans? What does “wealthier” mean? We will simply have to wait and see. President-elect Biden has said he doesn’t want to increase the tax burden on middle class Americans, but time will tell. We should not be caught off guard if there are changes to the capital gains tax rate and the dividend tax rate.

I’m not terribly concerned about changes to the 2021 tax code, but we’re keeping an eye on what’s to come in the years ahead and how we can help our clients prepare. One obvious example is if we expect capital gains taxes to rise in 2022, we will work with clients to determine if we should realize capital gains this year while the tax rate is lower.

While higher taxes may be tied to Democrats taking the helm in Washington, we have seen government spending increase for years under both parties—but we have not seen taxes increase. As the government continues to spend, at some point, taxes will have likely to increase to fund the deficit. The government cannot spend forever without eventually raising taxes (although some economists debate this). Presumably, taxes will have to go up eventually, regardless of which party is in power. If you’re interested in the long-term impact of the growing government deficit,

This is just my opinion, but I would like to point out that not all government spending is created equal. I think it’s admirable the Trump administration, Congress, and the Federal Reserve came together and took steps to help people and businesses during the darkest days of COVID-19.

Between the pandemic and changes coming to Washington, DC, these times feel uncertain for many. If you would like to work with a team of financial advisors and financial planners that actively manages your portfolio, please contact us today. Because we purchase individual stocks and bonds for our clients, we have the flexibility to make changes to the companies we’re invested in when life happens, and things change. You can email me at [email protected].

-Cory Bittner, CRPC?