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Tag: 2020

2020 Elections – Prepare and Be Patient

Pandemics and protests.  Wildfires, market crashes, and a recession.  If someone ever tries to tell the story of 2020 on film, it will take more movies than Star Wars.  At one point, we even had to worry about murder hornets.  Murder hornets! 

There’s no question this year has been a crazy one.  But it’s about to get even crazier – because a new presidential election is less than one week away. 

Over the last few weeks, several clients have asked us what the election could mean for the markets.  At a time when there is so much uncertainty to deal with, the thought of adding an election to the mix can seem overwhelming.  So, we thought we’d write about how we should prepare for both the run-up and aftermath of the election.  What exactly does the upcoming election mean for the markets?

Short-Term View: Prepare for Volatility

Uncertainty.  That’s the keyword.  Investors hate it, the year has been full of it, and the lead-up to a presidential election just brings more of it.  As a result, the markets often see increased turbulence in the month before an election.  For example, in October of the last four presidential election years, the markets fell.1 

We don’t ever try to predict the future, but we should be especially prepared for volatility this year. That’s because there are still so many question marks surrounding our economy and the pandemic. For example, the pandemic is showing no signs of stopping, and indeed cases may climb again as winter sets in. The economy has improved, but is still on thin ice, with unemployment rates still stubbornly high. Investors are watching Congress with bated breath, waiting to see whether they’ll enact a new stimulus package. If not, that could spell trouble, as many economists believe more stimulus is needed for the economy to recover.

But there’s another reason why we should prepare for volatility: The possibility of delayed – or worse, disputed – election results. 

Thanks to the pandemic, more people are likely to vote by mail than ever before.  Mail ballots take longer to count than traditional ones, and some states “will count ballots that are delivered after the election if they are postmarked by a deadline.”2  Because election officials are more concerned with counting votes correctly than quickly, we may not have a winner declared for several days or even weeks.  In fact, earlier this year, during primary season, several states needed more than a week before they could declare a winner. 

Remember, uncertainty is the key word.  Any delay may well cause more of it, which could trigger volatility.  Then, too, some politicians have cast doubt over the very idea of mail ballots.  If the losing candidate feels there is ground to contest the results, that could delay the process even further, leading to – you guessed it – more volatility. 

We don’t have to look far back in history to see what the markets did the last time results were delayed.  Remember the drama surrounding the 2000 election?  On election night, Florida’s results were considered too close to call.  Over the next month, Americans learned more than they ever wanted about things like dimpled chads and butterfly ballots.  The S&P 500, meanwhile, dropped over 8% between election day and December 15 when the result was finally decided.3

Now, none of this is to say that pre- and post-election volatility is guaranteed.  It’s not.  We should, however, prepare ourselves for it.  Because the more mentally prepared we are to weather short-term uncertainty, the better equipped we are to remember…     

The Long-Term View: Patience Over Politics

Every four years, we hear people say, “If the Democrats/Republicans win, we’re going to sell (or buy) because that means the markets will fall (or rise).”  It is understandable why people think this way.  After all, politics play an increasingly large role in our daily lives.  Why wouldn’t they impact our portfolio, too?  But the truth is, presidential elections are relatively unimportant when it comes to the markets, at least in the long-term.  A quick look at history bears this out. 

Historically, the S&P 500 has gone up 10.8% under Democratic presidents and 5.6% under Republican presidents.4 That’s not a large difference and can be attributed to a whole range of factors besides politics.  Either way, the markets tend to go up over time. 

One thing we’ve noted in recent years is that as elections get more partisan, so too does the rhetoric about how the candidates will impact the markets.  For example, here’s the opening sentence from a CNBC article published on November 3, 2016, shortly before the election:

Wall Street’s long-running view that Hillary Clinton would easily become the next president has been replaced by a new fear that Donald Trump could win, and it probably won’t be a pretty picture for stocks if he does.5  

Here’s a snippet from an article in the New York Post written a few months before Barack Obama was first elected:

…it’s hard to see how a President Obama would be good for Wall Street.  He wants to raise the capital-gains tax…[which] would be great for the tax-shelter business, but stocks would tank…in other words, the markets could fall further from their already-beaten down levels once the street begins to focus on an Obama presidency.6

Both these predictions ended up being wide of the mark.  In the first year of President Obama’s presidency, the markets rose 23.45%.6  In President Trump’s first year, the markets gained 19.42%.7  Doom and gloom is predicted more and more with each election and yet the markets keep going up over time. 

This is exactly why we are long-term investors.  As the saying goes, it’s not about timing the market.  It’s about time in the market.  This is why making investment decisions based on politics just doesn’t make sense.  As you already know, emotional decision-making has no place when it comes to investing.  But few things prompt as much emotion as politics.  That’s why it’s crucial that we keep politics out of your portfolio. 

It’s true that Trump and Biden have different economic policies, and some of their policies will affect the markets to a degree.  But the markets are like the world’s most complicated cake recipe, and the president is just one relatively minor ingredient.  Far more important are supply and demand, innovation and invention, mergers and acquisitions, the ebb and tide of trade, and a host of other economic developments both large and small.  Making major investment decisions based on politics would be like carefully measuring how much chocolate goes into your cake while ignoring the amount of sugar, flour, and eggs.

So, what does the election mean for the markets?  In the short-term, potentially a lot.  In the long term, probably not much.         

2020 has been a long, crazy year.  It’s possible the next few months could be even crazier.  But in the grand scheme of things, they are still just a few months, and this is still just one year.  We’ll be investing long after Trump and Biden are both names in the history books. 

In the meantime, our team is here for you to answer your questions.  Please let us know if we can be of service.  Be well, stay safe, and enjoy the rest of your year!     

SOURCES:

1 “S&P 500 Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices

2 “When Will We Know the 2020 Presidential Election Results? A Guide to Possible Delays,” The Wall Street Journal, https://www.wsj.com/articles/will-we-know-who-is-elected-president-on-election-night-a-guide-to-possible-delays-11596629410

3 “Why stock market investors are starting to freak out about the 2020 election,” MarketWatchhttps://www.marketwatch.com/story/why-stock-market-investors-are-starting-to-freak-out-about-the-2020-election-11600964863

4 “Democratic presidents are better for the stock market and economy than Republicans, one study shows,” Business Insiderhttps://markets.businessinsider.com/news/stocks/stock-market-election-democratic-republican-presidents-better-performance-economy-gdp-2020-8-1029528932#

5 “This is what could happen not the stock market if Donald Trump wins,” CNBC. https://www.cnbc.com/2016/11/02/this-is-what-could-happen-to-the-stock-market-if-donald-trump-wins.html

6 “Wall St. Death Wish,” The New York Posthttps://nypost.com/2008/08/04/wall-st-death-wish/

7 “S&P 500 Historical Annual Returns,” Macrotrends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns

Tax-Related Updates for 2020

CHANGES TO FEDERAL TAX BRACKETS1

As expected, the IRS has adjusted the 2020 tax brackets based on inflation.  They are as follows:

Tax RateSingleMarried, filing jointly Head of Household
10%0 to $9,8750 to $19,7500 to $14,100
12%$9,876 to $40,125$19,751 to $80,250$14,101 to $53,700
22%$40,126 to $85,525$80,251 to $171,050$53,701 to $85,500
24%$85,526 to $163,300$171,051 to $326,600$85,501 to $163,300
32%$163,301 to $207,350$326,601 to $414,700$163,301 to $207,350
35%$207,351 to $518,400$414,701 to $622,050$207,351 to $518,400
37%$518,401 and up$622,050 and up$518,401 and up

CHANGES TO DEDUCTIONS1

Per the IRS, the standard deduction is “a specific dollar amount that reduces the amount of income on which you’ve been taxed.”

The IRS has increased the standard deduction for 2020.  For singles, the standard deduction is now $12,400, up from $12,200.  For married couples filing jointly, it is $24,800, up from $24,400.  For heads of households, the standard deduction is $18,650, up from $18,350.

Remember, you can’t take the standard deduction if you also itemize deductions.  And for married couples filing separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.

CHANGES TO CAPITAL GAINS1

The income threshold for long-term capital gains rates has also gone up.  

Tax RateSingle Married, filing jointly Head of Household
0%0 to $40,0000 to $80,0000 to $53,600
15%$40,001 to $441,450$80,001 to $496,600$53,601 to $469,050
20%$441,451 and up$496,601 and up$469,051 and up

CHANGES TO 401(K)S3

For 401(k) and 403(b) plans , the maximum contribution limit for 2020 is now $19,500, up from $19,000 last year.  Those age 50 or older can also contribute an additional $6,500, using what’s known as a catch-up contribution.  That’s also up $500 from last year.   

CHANGES TO IRAS4

In December, Congress passed a new bill called the SECURE Act.  The bill, which went into effect on January 1, wasn’t about the tax code per se, but it did make some important tax-related changes to IRAs.  

Before the SECURE Act, owners of a traditional IRA would have to begin making withdrawals at age 70½.  (These are called required minimum distributions, or RMDs.)  Now, that age has increased to 72.  That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.

Another change is for new parents.  Previously, a non-retired person had to be 59½ years old to make early withdrawals from a traditional IRA. If they withdrew money earlier than that, they would have to pay a penalty of 10% on the amount they took out, except in a few extraordinary circumstances.  

Under the SECURE Act, new parents can now withdraw funds penalty-free to help cover birth and adoption expenses.  This is especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they need to be made within one year of the birth or adoption.

By the way, if you haven’t already contributed to an IRA, there’s still time to do so.  Many people don’t know that the 2019 contribution deadline is actually April 15, 2020.5  However, if you do decide to contribute, you must designate the year you are contributing for.  (In this case, 2019.)  Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact me if you have any questions or need help.

For 2019, the maximum amount you can contribute is $6,000, or $7,000 if you’re over the age of 50.5  This applies to both traditional and Roth IRAs.  

If you have yet to set up an IRA for 2019, you can still do that.  The deadline to establish an IRA is also April 15th.  In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.  

CHANGES TO 529 PLANS4

Another tax-related change is for parents and grandparents with 529 plans.

As you may know, any funds invested in a 529 plan can be used to help pay for college expenses, like lodging or tuition.  The best part is that the funds are exempt from federal taxes, and often state taxes, too, so long as they’re used solely for education expenses.  

Under the SECURE Act, parents with 529 plans can make a tax-free withdrawal of up to $10,000 to help pay off their child’s student loans.  This number is per person, not per plan, which means another $10,000 can be withdrawn to help pay the student debt for each of the plan beneficiary’s siblings!

CHANGES TO ESTATE TAXES1

For 2020, the estate tax exemption will be $11,580,000 per individual.  That’s up from $11.4 million in 2019.  That means any estates worth less than this amount will be exempt from paying the estate tax. 

***

We hope you found this information helpful.  Obviously, it’s not a completely exhaustive list of every tax change for 2020.  But it is an overview of some of the most important ones.  If you have any questions or concerns, please let us know.  

Sources

1 “Revenue Procedure 2019-44,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/pub/irs-drop/rp-19-44.pdf” https://www.irs.gov/pub/irs-drop/rp-19-44.pdf

2 “Standard Deduction,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/taxtopics/tc551” https://www.irs.gov/taxtopics/tc551

3 “401(k) contribution limit increases,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500” https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500

4 Text of “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” (page 1532), Senate Appropriations Committee, December 16, 2019.   HYPERLINK “https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF” https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF

5 “IRA FAQs – Contributions,” Internal Revenue Service,  HYPERLINK “https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions” https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions