Impact
We have now had a week to digest and reflect on this year’s election results and their impact on our clients’ financial plans.
Undoubtedly the largest election implication for our clients will be what happens on January 1, 2026.
As you likely know, the reduced income tax policies implemented in 2016 expire after 10 years on December 31, 2025. Thus, we have been assuming our clients would need to account for increased taxes on both income and estates starting in 2026. Those tax increases appear far less likely now.
If Republicans maintain their current slim majority in the U.S. House of Representatives, then it is highly likely there will be tax legislation in 2025 that will extend current tax policy for at least an additional 10 years. There is even an outside chance it could be made permanent. We will be monitoring the legislative process closely to assess the coming changes.
On a personal level, this means our clients’ income goes further due to less tax drag – improving the long-term viability of their financial plans. On a countrywide level, unless this extension of reduced federal income tax revenue is offset by significant reductions in government spending, our federal government’s annual budget deficit will be higher than projected and our cumulative federal debt will accelerate higher every year.
Higher debt levels could gradually lead to higher interest rates on government debt due to a higher default risk. This has a cascading effect that leads to higher mortgage rates and higher interest costs on corporate debt. The impact could be that higher debt costs create headwinds for future economic growth.
A secondary impact will be on the regulatory front. The new executive branch leadership will likely be less inclined toward expanding federal regulations, creating more certainty for companies. The one exception to this may be large technology companies that could come under increased federal scrutiny.
Overall, traders have thus far responded positively to the impact of a potential lighter regulatory and tax burden for companies and the corresponding benefits to economic growth. However, it is difficult to identify in advance whether traders’ post-election enthusiasm is sustainable or whether the potential benefits have been exaggerated.
This is particularly true given the third election impact — a higher probability of unexpected unknowns.
To call the former President and President-elect unconventional is an understatement. His second administration is more likely than the first to include unforeseen policies and negotiating strategies that make normal politicians queasy. He is no longer burdened with positioning himself for re-election and has embraced similar unconventional thinkers.
Traders are likely to be sensitive to surprises that could be lurking around every tweet. The impact could be above average volatility in the financial markets for the next four years.
We will only know the true impact of this election when historians have a chance to reflect on how the next four years unfold from the luxurious perch of the future. Until then, we must live one day at a time while minimizing the impact of politics on our portfolios and financial plans.
Quote of the week: Carl Richards: “As the world feels more risky, it’s helpful to focus on understanding our exposure. Risks ask the question ‘What could happen?’ And there are endless answers! Exposure asks, ‘What impact would it have on me?’”
