Top Picks: Election Effects
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History will be made once again in our country on November 5th and as we are just days away from electing a 47th president of the United States, there is plenty to ponder personally and financially. The results will no doubt affect our future. For example, the stock market has soared over the course of the presidential campaign but will it continue with a win by Trump or Harris? All of that remains to be seen but our investors believe we must keep an eye on a few things that could be affected by the election. First, AllianceBernstein 's Municipal Portfolio Manager, Daryl Clements examines if there could be any proposed tax policies that could impact the municipal bond market from the election results.
Tax Policy and Municipal Bonds: Perspectives from Daryl Clements
AllianceBernstein’s Daryl Clements, a Municipal Portfolio Manager, emphasizes the importance of tracking tax policy changes. In particular, the 2017 Tax Cuts and Jobs Act, which is set to sunset in 2025, remains a focal point for investors. The election outcome will likely influence the future of tax cuts :
"The major focus of investors tends to be on the 2017 Tax Cuts and Jobs Act. Some of its provisions are due to expire at the end of 2025. Not surprisingly, there’s a lot of attention on personal income taxes. It looks like Trump may favor extending the Act’s tax cuts across the board, whereas Harris is expected to extend the cuts to single taxpayers earning less than $400,000 and joint taxpayers earning less than $450,000. Anyone making more than that would see the top marginal rate go back to 39.6%. So what does that mean for municipal investors? Well, higher personal income taxes would make municipal bonds more attractive. I would also tell you that AMT, or alternative minimum tax, rules can affect the value of some municipal bonds. The 2017 Tax Act raised the AMT exemption, and that meant that the number of taxpayers subject to the AMT plunged to about 200,000. If the higher exemption expires, it could make a lot of taxpayers—more than 7 million, actually—AMT eligible yet again. When the exemption increased, federal tax revenue was lost. The Harris camp might want to let the higher AMT exemption expire, whereas Trump would likely push to extend the current levels. We think the AMT exemption will probably be extended. A permanent extension could cause spreads to narrow on municipal bonds subject to the alternative minimum tax, which is about 4% of the market."
Corporate Tax Rates and the Demand for Municipal Bonds
Another critical insight comes from Max Christiana of Belle Haven Investments , who stresses the impact of corporate tax policies on muni bonds . Currently, the corporate tax rate is 21%, but a Trump administration may aim to lower it to 15%, which would likely decrease demand for municipal bonds. Conversely, a Harris administration could raise the rate to 28%, increasing muni bond appeal among corporations, banks, and institutional investors:
"Obviously the biggest thing in muni is just tax exemption. Obviously, the corporate tax rate, depending on who is the victor may fluctuate. Obviously, right now it's around 21%. If you see Trump victory, he's hinted that he'd like to push it towards 15%, which would be, you know, more negative for muni demand. Whereas if Kamala Harris wins, she's, you know, floated the idea of a 28% corporate tax rate. And if that were to happen, you may see a lot of corporations, banks, et cetera, come back to the muni market and really drive up demand for munis. So that were to happen, you know, that could have a great effect on the demand of munis. And then also the SALT tax deduction. Right now, obviously that gets capped around $10,000 and you'd be see that removed. You know, if you go for state economics, you may see some slowdown and especially state demand just because the tax burdens will be slightly lower. But all in all, you know, we'll have to see how the selection plays out and then evaluate how that's going to affect muni demand."
Sector-Based Performance Opportunities During Election Years
On the equity side, Hamish Preston, CFA from S&P Dow Jones Indices observes that U.S. presidential elections often create distinct sector performance trends:
"What we have noticed in November's of US presidential election years is above average importance of sector membership in terms of driving the performance of different stocks and once again, I think that’s the idea that investors have been reacting to the candidates policies and the winning candidate’s policies and how they expect those policies to impact different parts of the market differently. (...) So I think what is interesting is if you look globally, this type of observation does crop up across different markets, the idea of having a sector perspective around elections so it’s pretty common around the world but across the cap spectrum. If you look at mid caps and small caps, what’s interesting is rather than it being the US presidential election, is the congressional election where you see a higher than average of sector membership for mid caps and small caps as represented by S&P mid cap 400 and S&P 600 sectors and perhaps one explanation for that is those companies are perhaps more domestically focused more on congressional results that may have more impact on those types of companies."
Final Thoughts: Strategic Vigilance in Uncertain Times
The upcoming election brings an environment of both uncertainty and opportunity. Investors can benefit from monitoring tax policies and sector-specific trends as they prepare for post-election adjustments. With the economic landscape in flux, strategic, informed decisions may help investors capitalize on potential changes in tax laws and market demand driven by corporate and sector policies.
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