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.
- In the near term, there may be more ups and downs in the market than usual due to election wrangling. But longer term, the key is the economic recovery, which is in its early phase, a period that has historically been good for stocks.
- Rising taxes haven’t meant falling stock prices historically. While future tax policies are unclear, even if rates do go up, there are financial planning moves to make to limit the potential impact on your bottom line.
- More fiscal stimulus and continued low interest rates are likely. So staying invested and riding out volatility may make good sense.
Seizing opportunities and managing risks are an essential part of investing. Sometimes you can see them clearly. But other times, uncertainty can cloud the way, leading to stress, even paralysis. For some investors, right now may be one of those times.
The good news is there are things you can do in the face of election and other uncertainties to stay in control of your destiny. Here are 9 insights from Fidelity pros to help you foresee possible risks, seize opportunities, and stay focused on reaching your personal goals.
1. Delayed or contested election results could fuel short-term market volatility
Because of the expected surge in mail-in voting due to the pandemic, it’s possible the election results will not be known on election night and a complete vote count may not be available for days or weeks.
"When you look at futures markets, they are already pricing in higher volatility in the November and December time frame,” says Dirk Hofschire, senior vice president of asset allocation research at Fidelity. “This may ultimately be short-lived because the Constitution requires a new president and congress in January. But I do think as an investor, the markets are telling you there may be a little bit more bouncing around than usual."
For most investors with a solid long-term plan, there is no reason to do anything in the face of short-term volatility. For opportunistic investors with cash on the sidelines, a pullback could present opportunities.
For more, read Viewpoints on Fidelity.com: What if election results are delayed or contested?
2. Longer term, the economy is the key to the markets
While the election may roil 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 ultimately controls the White House and Congress.
Historically, Octobers of election years have experienced heightened volatility. But once the winner is declared, markets have rebounded. Over the course of a full 4-year presidential term, investment returns have been surprisingly similar regardless of which party controls the White House: Under Democrats, returns have averaged 8.8%; under Republicans, 8.6%.1
Stock market returns and presidential partiesReturns are historical averages. Market performance is represented by monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, and Cowles Commission). Source: Fidelity Investments.
3. The economy is in an early growth phase, which historically has been good for stocks
Despite the ravages of the coronavirus on some sectors, particularly those associated with leisure and travel, most signs point to a healing economy. The US is in the early phase of the economic cycle, which has typically offered the strongest stock returns of all 4 phases of the business cycle.
Read Viewpoints on Fidelity.com: It's the dawn of the early cycle
Stocks have produced their strongest returns in the early phase of the economic cycle
4. The secular bull market that started in 2013 may still be running
Sharp corrections are not unusual during long-running bull markets. Consider the 1950s and the 1980s: 2 lengthy bull markets that also had a deep correction in the eighth year.2 So if the current secular bull market continues, it would not be unprecedented.
Plus, we are not seeing any of the common warning signs of the end of a bull market—heavy inflows into stock funds, increased mergers and acquisitions, rising interest rates, weakening revisions to earnings, and a shift to defensive sectors as leaders in the market.
Deep corrections within long-term bull markets have happened before
5. Expansionary fiscal and monetary policy—and low interest rates—are likely to continue
No matter which party wins the White House, spending from the federal government is likely to remain high. Spending is likely to be highest in a Blue Wave scenario where Democrats take control of the White House and both chambers of Congress. It's likely that either a Republican or Democratic president with a divided Congress would also pass stimulus bills, just not as expansive. Currently, markets seem to be pricing in the potential for a Blue Wave and a lot more spending, according to Timmer.
Expansionary fiscal policies could buoy stocks while the Fed absorbs the growing deficit by increasing the money supply through asset purchases. Such a fiscal/monetary cocktail may well be the most important driver for asset prices in 2021 and beyond, says Timmer.
For more, read Viewpoints on Fidelity.com: Early cycle: Policy is paramount
In the short term, expect interest rates to stay low, providing opportunities for borrowers and challenges for savers. In this environment, 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.
But if deficits continue to grow, there could be risks of inflation longer term. To hedge against that risk, you might consider adding some inflation protection to your investment mix with such investments as commodities, real estate, gold and Treasury Inflation-Protected Securities.
6. Tax hikes haven’t tanked stocks historically
Some investors worry about rising taxes if the Democrats were to take over the White House and Congress. But history suggests that rising taxes do not mean falling 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,3 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
7. There are things you can do to help mitigate the risk of rising taxes on your bottom line
Tax policy could change a lot or a little—or not at all. There's no way to know, so it’s important not to let potential policy changes drive investment decisions that might not be good for you 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:
- Converting a traditional 401(k) or IRA to a Roth
- Bunch several years of charitable contributions into this year
- Consider accelerating some capital gains
- Exercising stock options
- Revisit your estate plan
For more, read Viewpoints on Fidelity.com: Taxes and the election
8. Regulation could shift, creating winners and losers
Democrats tend to favor tighter regulations on businesses, so a shift in leadership in Washington could hurt certain industries, while helping others.
From a tax and regulatory perspective, industries that could continue to benefit from a Republican White House’s focus on deregulation include those that have historically been highly regulated and that do most of their business domestically. Examples include fossil fuels, health care, defense, domestic banks, and financial services companies. A Democratic White House would likely be tougher on them.
Industries that could benefit from a Democratic administration could include those that generate a large part of their income internationally, those that would be unaffected by higher tax rates, and some that may benefit from new regulation. Some examples include utilities, renewable energy, infrastructure builders, global financials, and parts of the insurance industry.
If you are an active investor who tactically allocates among different sectors, you may want to make some adjustments if regulatory policy changes in Washington.
9. 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:
- Making sure you have an emergency fund so you can weather short-term market drops or unexpected financial needs.
- Test-driving your investment plan under various scenarios can also help put the current uncertainties into perspective.
- If you feel you can’t stomach as much risk as you thought, there are more conservative investment mixes that can help you reach your goals rather than going to cash and missing out on all growth potential.
2020 has been a trying and tragic year. Particularly at uncertain times like these, having a financial plan can help you take control over your financial future. If you find it challenging to navigate market volatility or are concerned about the implications of future tax policies, let us help.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.
1. Jurrien Timmer, "Presidential elections and stock returns," 1/29/2020, Fidelity.com https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections
2. Source: FactSet as of 09/10/2020.
3. Chisholm analyzed stock market performance in the calendar year when there were increases in in federal personal, corporate, and capital gains taxes, plus the year prior and the year after.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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