No matter the election, money managers should always prepare for whichever way the political pendulum swings, both for their clients’ sake and for their firm itself.
A lot is at stake in any US presidential election, and this year proves to be no exception.
Regardless of one's predictions and preferred outcomes, money managers must be ready to adapt to any result.
And in an election season, the same lessons should apply.
With any politician and the policies they and their party advocate, those outcomes will have an impact on businesses and investment sectors.
What would a continuation of the Trump presidency or a newly elected Biden administration bring to the markets?
If Trump wins, industries that have already benefited from his presidency will likely continue to do so.
The trade war will likely continue, as US-China political relations have notably weakened since the pandemic started. Companies caught in the crosshairs, be they domestic agricultural producers that sell to China or those that rely on manufacturing and imports from China, will face prolonged uncertainty.
Similarly, with the trade war and Trump's "America First" approach, US manufacturers would benefit, including domestic drug manufacturers, now in the race for a coronavirus vaccine.
Military funding will remain a top priority for the Trump administration, as will vocal support for the Second Amendment. Whether it's national defense or personal defense, defense contractors (Lockheed Martin - LMT) and firearms manufacturers (Smith and Wesson - SWBI) could perform well under a second Trump term.
A Trump re-election means four more years of the President dominating the headlines (and the Twittersphere). His presence, love him or hate him, has resulted in a never-ending stream of ideas for content creators. Social and traditional media like Twitter (TWTR) and the New York Times (NYT), respectively, can surely capitalize, as Trump provides plenty of material to work with and many eyeballs to attract.
For a more detailed analysis, check out some of the Best Stocks for a Donald Trump Presidency.
If Biden wins, one can anticipate a boost for ESG investing. A Biden version of a "Green New Deal" would be favorable to renewable energy, as environmental regulations would increase and so would the incentives for cleaner and greener solutions.
Companies like Tesla (TSLA), which are heavily involved in solar and energy, could see its good fortunes continue upward.
While Trump has been supportive of domestic manufacturing, Biden has his own strategy for US-based production. Ernst and Young has analyzed what Biden's plans would look like, and according to Biden's own campaign website, the plan includes:
For a more detailed analysis, check out the 10 Best Stocks for a Biden Presidency.
While a Trump or Biden administration can affect investment outcomes, there are some events and trends that make little difference who is president.
The pandemic continues on, and while the President has received his share of criticism for handling the coronavirus, it would still take time for a Biden strategy to achieve its desired results.
What that means is companies like Amazon (AMZN) and other home delivery services would benefit from online purchases as Americans continue staying home. It also means companies like Zoom (ZM) benefit as people do their work and schooling from home.
The economic losses from COVID-19 would likely require government stimulus to keep many households financially afloat. Despite partisan bickering, either administration will feel the pressure to spend, print, and borrow money.
These fiscal decisions could impact the value of the dollar and gold prices, and it's something investors should think about no matter who is in the White House.
Given the positions Trump or Biden take, it allows for reasonable speculation of what the investment climate should be like under their administration. Investment managers should be prepared to make changes to their clients' investment portfolios.
However, nothing is ever guaranteed, and money managers should do their own analysis on what a Trump or Biden presidency means for investing.
In any case, the goal is to have a mindset that seeks opportunity in either presidential scenario.
Within the first year of the Trump presidency, The Tax Cuts and Jobs Act of 2017 passed. For money managers and their wealthy clients, there were some notable takeaways:
For investment firms and their clients, such policies are advantageous.
In spite of the tax cuts and pledges for further reductions, not all benefits are enjoyed equally.
While the middle class saw a reduction, higher income earners benefited more. High-tax states like California lost out on the deal, as the legislation made cuts to state and local tax deduction amounts. Taxpayers in such affected states saw taxes increase. Furthermore, a prolonged trade war and increased tariffs would make for more costly purchases, offsetting the benefits the middle class received from tax cuts.
Under a Biden administration, the tax landscape would see some changes.
Policies enacted by Trump could be repealed, and under Biden's plan, here is what would take place:
In short, the wealthiest individuals and largest of companies would pay more, rolling back Trump-era policies.
Despite the pledges, a Biden victory itself would not be enough to push forward his tax plan.
Democrats would need to maintain the House and claim a Senate majority in the upcoming election.
“Do you really think that when someone runs on an idea, gets elected and has control of Congress that that program is a sure thing?” said Ed Zollars, CPA and partner at Thomas Zollars & Lynch in Phoenix and an instructor at Kaplan Financial Education, "Don’t get ahead of yourself."
From a taxation standpoint, the current administration's policies have benefited money managers and the wealthier of clients, lowering taxes across the board.
But at the same time, budget deficits have increased, and recouping the losses would eventually call for tax increases. It just so happens that Biden is calling for those increases on the highest earners, returning rates to Obama-era levels more or less.
With the prospects of increased taxes and rising chances of a Biden victory, investment firms and their clients would have to act quickly when it comes to minimizing their taxes on wealth transfers.
The Trump administration's estate tax policy doubled the amount that wealthy families can pass on without paying tax (up to $11.58 million for individuals and $23.16 million for couples).
It takes time to set up a trust, decide which assets to give to whom, and appraise the assets. According to wealth advisors advocating these wealth transfers, the sooner, the better.
“We’ve been telling people: ‘Use it or lose it.' It’s the golden age of estate planning for a lot of people.
We may not see anything like it again.” Jere Doyle, Estate Planning Strategist at BNY Mellon Wealth Management.
Of course, there are a lot of hoops to jump through in the American political process, so a Biden win doesn't necessarily mean his policies take immediate effect.
With a Biden win, firms should prepare to adjust budget forecasts and resource allocations. With payroll taxes and corporate taxes expected to rise, investment firms should consider looking at areas to reduce costs.
One of our previous posts covered the topic of cost reduction in office space, and we have long talked about reducing operational costs through our Empaxis solutions: the TAMP1 platform, middle- and back-office outsourcing, and automation services.
With everything that's happened this year, it's clearly evident just how important it is to communicate with the clients.
It's been hard for many dealing with COVID-19, the surrounding economic uncertainty, and a presidential election on the horizon. They need assurance from their advisors that their finances are in good hands.
Money managers should be available to listen to their clients' concerns, as well as communicate to clients their investment strategies and tax implications depending on who is elected.
These kinds of conversations may touch into politics, and that's not necessarily a bad thing.
According to an August 2020 Hartford Funds survey of 872 investors with at least $100,000 in investable assets, 75% of respondents said they discuss politics with their financial professional, and 57% believe it's important for their advisor's politics to align with their own.
Even if an advisor and client do not align politically, it is up to the advisor to maintain professionalism and neutrality: be aware of client sensitivities, try to understand the client's perspective, present objective data when politics and investing mix together, and never lose sight of the client's best interests.
“Understand the story behind the stance” of the investor, says John Diehl, senior vice president of applied insights at Hartford Funds. Diehl pointed out that these discussions, if done properly, “can uncover further details on what clients value, their investing habits and ultimately help foster a strong, effective relationship.”
Money managers need to prepare for any and every scenario when it comes elections.
"It ain't over 'til it's over" is the lesson to be learned from the 2016 election, as the outcome took many pollsters and pundits by surprise.
Be flexible, be adaptable. Find opportunity and protect against risks in either outcome.
Consider the most suitable investing strategies and tax implications associated with each victor, and always keep the clients in the loop and their best interests at heart.
When it comes to investing, the money managers who prepare for anything and everything are the real ones who win during an election.