Guest Post By Donald Calcagni, CFP®, MST
Chief Investment Officer, Mercer Advisors
The blue ripple
With Georgia’s senate races now behind us, Democrats now control both chambers of Congress and the White House. The new Senate will be evenly divided between Republicans and Democrats but, by the narrowest possible majority, Democrats will have control given Vice President-elect Kamala Harris’s tie-breaking vote. Similarly, Democrats lost seats in the November elections and now hold a razor-thin majority of only 10 seats in the House of Representatives. While President-elect Biden’s election victory over President Donald Trump was more decisive (306-232), he nevertheless assumes command of a divided nation that’s been wounded by the insurrection at the Capitol and a bitter election. Democrats’ anticipated blue wave has become, by any measure, little more than a blue ripple.
Forget the campaign rhetoric. The reality remains that, despite Democratic control of the Senate and House, the prospects for major regulatory changes remain quite low. With the Senate and House almost evenly divided, centrists have significantly more clout than would otherwise be the case had there been a more decisive “blue wave,” as many Democrats had hoped. It should come as no surprise that the Congress nearly perfectly mirrors the division of the American electorate. Subsequently, moderates from both parties, such as Joe Manchin of West Virginia and Sue Collins of Maine, will likely act to temper any attempts to enact major policy changes. Further, major policy changes, for example an increase in taxes as promised by President-elect Biden while on the campaign trail, require a supermajority (67 senators) to pass the Senate. Even less sweeping legislation would still require a minimum 60 votes to overcome the filibuster. That said, investors would be wise to still expect at least some regulatory changes, albeit relatively minor ones. For example, some changes might include somewhat higher marginal income tax rates at the upper end which may, in part, be partially offset by the reinstatement of certain itemized deductions (e.g., the deductibility of state and local income taxes). However, given the make-up of the new Congress, major changes to estate, dividend, and capital gains taxes are likely off the table.
There are also areas where both parties are likely to agree. With interest rates at historic lows and the nation struggling to combat the economic impact of COVID-19, there’s bipartisan support for a large infrastructure package that would also likely include increased spending on education (Democrats have argued any definition of infrastructure should include human capital, not just physical capital). Such new spending will provide yet another powerful tailwind for financial markets, especially stocks, but will also add to the nation’s ballooning federal debt. Finally, neither party is happy with the current state of “Big Tech,” especially social media companies such as Twitter and Facebook. The prospect of new anti-trust legislation, the repeal of specific legal protections (e.g., Section 230), or increased regulatory oversight all seem quite likely.
Over the past nine decades, the United States has faced contested elections, impeachments, wars, economic and geopolitical crises, and even terrorist attacks. Our system of government, regardless of party control, has managed to work through these and other challenges to our democracy and economic well-being. And through it all, the S&P 500 delivered a compound annual return of 9.9% to investors. Overall, markets were positive in 73% of all calendar years since 1928. The only reliable conclusion one can draw from market history is that, despite which party controls the White House or Congress, markets continue to be reliable venues for building wealth over time.
The road ahead
None of this is to say that markets won’t be volatile over the next few years; of course they will, just as they have under prior administrations and Congresses. The great thing is that there are time-tested risk management strategies for reducing the impact of market volatility and regulatory changes on your portfolio. The first, and most obvious, is portfolio diversification. The real lesson of 2020 for investors is that diversification worked when it was needed most, first during March’s brutal bear market sell-off and again in the fourth quarter’s venomous election when market leadership rapidly rotated out of technology stocks and into small cap, value, and emerging market stocks—all of which were previously unloved asset classes.
The second and perhaps less obvious strategy for managing regulatory risks is proactive wealth management, especially with respect to taxes and estate planning. Working with a trusted advisor, one with a deep bench of highly trained in-house tax attorneys, CPAs, and other experts, can make all the difference in the world when it comes to protecting you and your family from changes to tax or estate laws. Proactive, ongoing planning isn’t just achieving goals—it’s also about managing those risks that present a very real threat to those goals, whether those risks be market, tax, or legal in nature.