Editors’ note: Our political analysis is intended to be nonpartisan and focuses exclusively on political developments’ potential market impact. We favor no party, politician or ideology and believe political bias causes investing errors.
We are more than 600 days away from Election Day 2020, but presidential hopefuls have already started tossing their hats into the ring and spouting big ideas. Accordingly, financial media have begun dissecting these ideas—particularly those related to taxes, a thorny issue assured of getting eyeballs, especially with April 15 approaching. It seems every would-be candidate has a tax plan, from direct wealth taxes to financial transactions taxes. Even a charismatic freshman congressperson with a big social media following has gotten into the game. However, trying to predict the economic or market impact of any of these tax plans now is an exercise in futility, in our view. It falls under the realm of possibility, not probability—too many variables can change, and investing based on speculation is a mistake, in our view.
Before diving into the specifics, we believe tax changes aren’t meaningful market drivers. Tax plans—and the surrounding debate—tend to involve a lot of sociology, which can affect people’s lives in many different ways. However, contrary to conventional wisdom, tax changes don’t have a preset market impact. Cuts aren’t inherently bullish; hikes aren’t innately bearish. Moreover, since tax policy is widely watched and usually takes a while before going into effect, forward-looking stocks have plenty of time to digest and price in their effect—sapping surprise power. So whether you love or loathe a certain tax plan, don’t let those biases affect your investment decisions—a difficult task considering how dramatic and radical some plans sound.
Among the tax proposals generating buzz, Massachusetts Senator and 2020 Democratic primary contender Elizabeth Warren has pitched an “Ultra-Millionaire” wealth tax that charges 3% on net wealth above $1 billion and 2% on wealth above $50 million. California Senator Kamala Harris’s $3 trillion tax plan involves “billions in tax credits to low-income renters, a Medicare-for-all health-care system, and a reduction in cash bail for inmates charged with criminal offenses.” Vermont Senator Bernie Sanders, who hasn’t officially announced a 2020 run yet, just introduced a tax plan to Congress in which total estates valued above $1 billion would face a top rate of 77%. Freshman Congressperson Alexandria Ocasio-Cortez, who is too young to run for president in 2020, has made waves calling for a 70% marginal tax rate on income $10 million and higher. These ideas are red meat for research outfits and tax wonks that spill oodles of pixels dissecting and projecting each plan’s pros and cons. Though media regurgitate these studies and trumpet how very good/bad the tax policy would be for the country, we suggest not jumping that far ahead.
While dissecting tax proposals may be interesting from an academic standpoint, it is speculative. Tax ideas grab headlines with eye-catching plans and buzzwords, but any plan is a loooooooong way from reality. Consider the logistics. First, the candidate must win their party’s nomination. Then, the nominee has to win the election—in this case, unseat incumbent President Donald Trump and perhaps overcome a centrist run from Starbucks impresario Howard Schultz. Even if that happens, the new president doesn’t get to implement his or her plan at will. Congress sets tax law. If it is too early to handicap the 2020 presidential winner right now, good luck trying to project the next Congress’s makeup.
Even if the new president’s party wins a majority in Congress, a prospective tax plan won’t necessarily pass as advertised. In 2017, the Republicans held a slim majority in both chambers. Yet they took nearly a year to pass a watered-down version of their tax reform plan. And some policies, like Senator Warren’s wealth tax, stand on questionable constitutional ground. As for the prospect of a Democratic White House and Congress taking power and reversing that tax reform, what pols promise on the campaign trail doesn’t automatically become policy. In 2008, then-candidate Barack Obama and others campaigned against the 2001 “Bush tax cuts.” However, President Obama compromised and extended those tax cuts for another two years in 2010, and in 2012, Fiscal Cliff negotiations yielded a compromise that made many of the tax cuts permanent. Politicians can work up a storm when campaigning, but they tend to moderate in office. While tax and other policy ideas can give a sense of what a candidate prioritizes—information for the market to price in—they are far from ironclad. Often, such proposals are more symbolic than anything else.
Rather than get caught up in the presidential horse race, we suggest focusing on today’s underappreciated positive political drivers. Namely: We are in the third year of President Trump’s first term. The third year of a president’s term is historically its most bullish. For one, Congress tends to be gridlocked following the previous year’s midterm elections. Since lawmakers won’t be able to pass many major new laws, legislative uncertainty—which stocks hate—falls. Secondly, the incumbent and challengers start looking ahead, and the closer they get to voting day, the more risk averse they become. Pols don’t want to upset voters, and they also start spending more time priming for the upcoming race than writing and passing new laws. While the rhetoric may grow louder, actions become more muted. Stocks tend to thrive in this environment. (Exhibit 1)
Exhibit 1: Stocks Dig Year Three
Source: Global Financial Data, Inc. and FactSet, as of 1/14/2019. S&P 500 total return, 1925 – 2018.
Presidential hopefuls will only make more noise as the race heats up. For investors, most of this is speculative. Tune it out (or enjoy it, if that is your thing), but from an investing perspective, don’t let grandiose-sounding plans deter you from markets this year or otherwise influence your portfolio decisions. Proposed tax plans don’t override the overlooked realities of a gridlocked Congress and moderating Executive Branch this year.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.