Economy

Source: DataTrek

It’s worth noting that long-term borrowing costs for the US were higher when all three rating agencies had the US debt rated AAA. This was in 2006 – 2007, when 10-year Treasuries often paid +5.0 percent and yields were never below 4 percent.

Fortunately, US credit rating downgrades in the past have not triggered structurally higher interest rates, recession or declining stock prices.

Even so, the Moody’s downgrade serves as a reminder that the US federal government’s debt and deficit trends are troublesome.

In a June 3 article entitled Wall Street is Sounding the Alarm on US Debt, the Wall Street Journal points to the following:

• Annual interest on the US debt is currently above $1 trillion
• The tax-and-spend legislation currently being debated in Congress would add about $3 trillion to the national debt over the next decade ($5 trillion if certain features were made permanent)
• Federal interest payments this fiscal year will be more than the defense budget; or more than Medicaid, disability insurance, and food stamps combined

It’s particularly difficult for individuals who are careful and prudent when managing their own personal financial situations to imagine that such large fiscal imbalances can continue indefinitely.

As a country, we are moving closer to a point when uncomfortable actions likely will be necessary – either through significant reductions in government programs to reduce spending, or by sizable tax increases, or via some combination of spending cuts and tax hikes.

-RK

In this article:

• Review of recent government policy actions
• Recap of financial market performance as of early April
• Crisis case study
• Ideas for investors facing financial market disruption

Policy Action Review

“Liberation Day” arrived on April 2, when President Trump announced his newest round of tariffs during a Rose Garden press conference.

The president also presciently warned “there may be short-term pain.” Indeed. US stockholders were collectively liberated from about $5 trillion in the most recent two trading days, according to Reuters news agency.

After stocks fell sharply on April 3 and 4, the onset of a new bear market (typically defined as a 20% market decline from the recent peak) which was hard to imagine just weeks ago, now looks much more likely.

This time around, government policies have precipitated financial market disruption and are expected to cause widespread economic dislocation.

A summary of the Trump Tariffs:

• 10% baseline on all imports, effective April 5
• Assess higher country-specific tariffs for the “worst-offending” trading partners, effective April 9
• Combining the new tariffs with those that have already been announced moves the average effective tariff rate up to about 22%
• Canada and Mexico were notably excluded from the most recent round of tariffs
• Aluminum, steel, and autos are also exempt as they are already covered by targeted tariffs
• Energy, minerals, copper, pharmaceuticals, semiconductors, and lumber were excluded, but are expected to be affected at some point by sector-specific tariffs

The new tariff regime is roughly equivalent to the high tariff levels of the early 1900s, a time when the US economy was far smaller and much less integrated with the global economy.

Tariffs likely will present a sizable shock to both prices and economic growth.

The estimated impacts to economic growth and inflation are:

Source: Apollo

These impacts, assuming the announced tariffs remain in place for some time, mean that economic growth in the US for 2025 is likely to be in the neighborhood of 1% (not a recession) and inflation will probably be in the neighborhood of 4%.

Following the announcements on Wednesday, professional forecasters began to raise the probability that the US economy will fall into recession.

For example, Goldman Sachs puts the risk of US recession at 35%, while JP Morgan now places the odds of a recession at 60%.
Despite recession odds climbing significantly, most Wall Street economists continue to support a base-case scenario of modest economic expansion in 2025.

However, because the tariffs were far steeper than expected, the reaction in the financial markets was pronounced and negative.

Financial Market Assessment

So, just how bad has damage been in the financial markets? For stocks, the short answer is: pretty bad.

The policy-driven Liberation Day was followed by investor-driven “Hibernation Days”: the broad-based S&P 500 index of large-company US stocks, for example, fell by more than 10%. US stocks are now within spitting distance of a bear market.

Bonds have provided a counterweight in balanced portfolios, with many bond funds registering price appreciation. The Bloomberg Aggregate US Bond Index (investment grade bonds) increased in value by about 0.5% during the past two days.

Below is a table of historical asset class returns, ranging from very short-term (last two days), to the long term (previous 10 years).

Source: Morningstar

How much worse could it get?

The answer depends largely upon the extent of the economic damage, which likely will be a function of the extent and duration of the new tariff regime.

Since 1950, there have been 56 pullbacks of 10% or more, according to a recent article in Barrons. Twelve months after those corrections, stocks were higher 49 times.

Of the seven they failed to rebound, six of them came during a recession. In the median recession, stocks have fallen by 25%.

The most recent “worst” recession / bear market combination occurred during the Global Financial Crisis of 2007 – 2009. The unemployment rate reached 10%, and the US stock market declined by approximately 56%.

The second worst recession / bear market combination in recent times occurred in 2000 – 2002, following the “dot-com” bubble. The unemployment rate reached 6%, and the US stock market declined by approximately 49%.

Crisis Case Study
The Trump Tariff War may turn out to be a seismic event. It may be the start of a reordering that will change economic and political relationships for decades. It might cause inflation to spike, companies to retrench, consumer and business confidence to crater, and workers to lose jobs.

Trump Tariffs may bring on an epic bear market in stocks, and stocks could stay in the gutter for an extended period. Or maybe they won’t.

In an optimistic scenario:

• foreign countries decide to negotiate rather than retaliate
• inflation rises incrementally rather than exponentially
• US companies decide to reshore operations that are currently located offshore
• foreign companies locate more of their operations in the US
• more jobs are created for US workers (who are also consumers)
• business and consumer spending goes up rather than down
• the economy continues to expand rather than contract

To expect that all this happens immediately seems a bit pie-in-the-sky. But it also can’t be ruled out.

In a less optimistic scenario, but still positive scenario President Trump may decide on a different course of action (history shows that Trump can change his mind). A new, new tariff regime may be less onerous, and the economic growth and inflation impact may be less severe than feared.

It’s fair to say that the current tariff regime is unprecedented in the US – at least in terms of the last hundred or so years. The range of potential outcomes from the new trade regime is wide, where “crisis and crash” must also be considered.

In the two worst-case scenarios referenced in the previous section (dot-com bubble and Global Financial Crisis), the issues affecting the US economy were multi-layered and deep.

In the case of the dot.com bubble, the speculative frenzy for buying “lottery ticket” stocks of unprofitable companies associated with the internet reached a fever pitch and pushed stock prices in general far beyond rational levels.

Also, widespread corporate accounting fraud precipitated widespread business failures which exacerbated the stock market crash.

In the case of the Global Financial Crisis (GFC), the combination of speculative frenzy in the US housing market; overextended homeowners; loosened US financial institution regulation; wildly extended bank balance sheets around the world; fraudulent activity at US rating agencies; and failure-to-act government were all factors in the stock market crash.

In today’s situation, stock prices are generally regarded as being high relative to history, but not wildly overvalued, so the condition of speculative excess seems to be absent.

Also, the traditional US banking system appears to be stable and sound. The regulatory screws were turned tightly post GFC, which has helped to keep bank risk taking in check.

So, the Trump tariff situation strikes me to be more of a single-event flashpoint.

For a case study in what can happen during a crisis caused by a single-event flashpoint, consider the situation in 2020:

• On February 4, 2020, the City of Boston reported the first case of the “novel coronavirus” in Massachusetts, which also happened to be the eighth case of the infection reported in the US
• On March 10, Massachusetts Governor Charlie Baker declared a state of emergency
• In late March 2020, the S&P 500 index of large-company US stocks plunged to its lowest point during the pandemic, declining by a third from its record high of a month earlier.
• Covid had been in the public consciousness for several weeks, and the magnitude of the health crisis was just sinking in.
• No one knew how deadly, or how long-running, the pandemic would be.
• A recession was just starting, and the severe economic contraction would extend into the summer.
• No one knew when we would have an effective vaccine (turns out, we got one by year end)
• Investors were panicking.
• Yet stocks began to turn around on March 24 (gaining almost 10% on that day alone).
• By August 18, the stock market was back at a record high.
• The first COVID-19 vaccine received approval in December 2020
• For the full year of 2020, stocks posted a gain of 18%

The pandemic was a health catastrophe, and many folks unfortunately are still dealing with related illness and personal loss.

The period of a half-decade ago also serves as a reminder for why it’s so important to stick to your financial plan and your investment strategy.

Covid crushed consumer and business confidence and tore through the social and economic fabric of the US. Financial market deterioration was sharp and swift, registering a 34% stock market decline in a matter of weeks during February and March 2020.

But recovery was sharp and swift, too, with stocks reversing the decline by August 2020, and ultimately gaining 18% for the full year of 2020.

Market Disrupted. Now What?

What should investors do? Looking before leaping is always advisable. So is pausing before pressing the “sell” button.

Reducing risk by selling stocks may bring temporary relief to emotional stress and pain caused by a sudden drop in stock prices, but it has seldom proven an effective approach for building wealth over the long term.

Prudent action can take a few forms during financial disruption, including:

• Tax loss harvesting:fo r individual or joint brokerage accounts subject to capital gains tax, a stock market downturn might cause prices of some individual stock or stock fund holdings to fall below cost. Selling holdings below cost creates a capital loss, which can be used to offset capital gains realized in other parts of the portfolio. Or, if no realized gains are available to offset, a realized loss can be used to offset taxable income, subject to an annual limit, and carries forward for use in future year.
• Roth Conversions: a Roth conversion involves taking a distribution from a traditional IRA, paying income tax on that distribution, and immediately depositing or “converting” that distribution into a Roth IRA. If a conversion takes place during a low point in stock prices (instead of during a high point), stock fund shares will have a lower value, so more shares can be moved from Traditional IRA to Roth IRA for the same tax bill. When the markets recover, the subsequent share appreciation in the Roth IRA occurs tax free.
• Rebalancing: If you believe that corrections are temporary, and that over the long-term stock prices will rise, then a stock market drop can be viewed as an opportunity. The idea of rebalancing is simple: investors choose a target asset mix (such as: 60% stocks and 40% bonds). When asset price changes pull actual portfolio weights away from target weights, investors sell the assets that have gone up in price and buy the assets that have gone down in price. This rebalancing brings the portfolio back into line with its target. When stock prices fall, rebalancing allows investors to buy long-term appreciating assets at a discount.

When investors are faced with economic crises (whether pandemic-induced or policy-inflicted) and financial market turmoil, advice such as “keep calm”, “try going for a walk”, and “don’t look at your account statements” probably falls flat.

However, sticking to your plan is not the same thing as sticking your head in the sand. It is important to be aware of what’s going on, to try to understand how the landscape might be different in the future, and to adjust your financial situation accordingly.

Taking prudent action may mean stress-testing your financial plan to account for a new economic environment and to give you confidence that things will be OK over the long term. Or it may mean reviewing your investments to see how changes in the financial markets might affect the prospects of future returns. It might even mean asking for an interpretation of a new technological development that is causing confusion or concern.

Susan, Donna, Alex and I are here to help with any of these issues, or other items that may affect your personal financial situation.

I’ll leave you with this closing thought: it will take much more than a draconian new set of trade policies to take down US consumers, US businesses, and the US financial markets. We may feel pain from self-inflicted wounds (in the words of JP Morgan analyst Bruce Kasman, “there will be blood”), but the damage is much more likely to be terminable (and manageable) rather than terminal.

For some, tariff “is the most beautiful word in the dictionary.” But not for all. Beauty is in the eye of the beholder.

Below is a table that summarizes the tariffs that have been announced so far (courtesy of Apollo) along with their corresponding dates of implementation:

A month ago, President Trump announced that he would impose sweeping tariffs on imports from Canada, Mexico, and China. Soon after, a last-minute deal was reached to delay the Canada and Mexico tariffs for 30 days.

During the first week of March, when the tariffs were scheduled to come into effect, the tariffs on Canada and Mexico were watered down with a 30-day reprieve for automakers.

Also, broader exemptions for other products that are imported from America’s neighbors were permitted after lobbying from business groups that warned of rising prices.

This fluid situation around tariffs may be a feature stemming from the administration’s approach to negotiation, and the backtracking could be a realization that tariffs likely will cause domestic production and supply disruptions, push up inflation, and weigh on economic growth.

The administration’s main economic goals of applying tariffs appear to be to:

• address unfair trade practices
• correct significant trade imbalances
• rebuild the US manufacturing sector

And trade policy that relies on tariffs as a cornerstone is high risk.

In a recent article, JP Morgan Asset Management’s Chief Global Strategist highlighted that tariffs have undesirable consequences including that they:

• Raise prices
• Slow economic growth
• Cut profits
• Increase unemployment
• Worsen inequality
• Diminish productivity
• Increase global tensions

Economists at major banks and research firms have begun to increase the odds that more tariffs will be implemented (and not just threatened) and applied for longer.

On Monday, March 10 the chief economist at Goldman Sachs published a report that factors in new, more adverse trade policy assumptions. He made a significant downgrade to his US growth forecast for 2025 (by nearly 1 percentage point) – though he still expects the US economy to expand this year.

Moody’s Analytics has estimated that if the US were to impose universal tariffs on all goods entering America, it could slow US economic growth by 3 percentage points by 2026, which likely would push the economy into a recession.

At this point, I don’t believe a tariff-induced US recession is the likely outcome, in part because tariffs still appear to be more malleable than ironclad, but also because the US economy has proven to be resilient and remains on a sound economic footing.

But it’s also quite possible that continued tough talk toward trading partners coupled with policy action that sticks will bite. A meaningful slowdown in the quarters ahead may be in the cards as well as more unsettling moves in stocks.

For all investors, holding to a stress-tested financial plan with an appropriate investment strategy and asset-allocation target is the time-tested way to weather financial market swings, irrespective of what headline or new development is causing the volatility.

And specifically for retirees who depend on portfolio withdrawals, verifying that enough cash is on hand to avoid having to sell stocks if stock volatility persists for an extended period, is always good practice.

-RK

The question I’ve been wrestling with since Thanksgiving (when it became fairly certain that 2024 would end up being another stellar year for stocks) is: “What comes next?”

To recap recent history: large company US stocks, as measured by the S&P 500 index, gained nearly 25% in 2024, which followed a 26% gain in 2023. Back-to-back stock market gains of such magnitude are unusual.

Researcher Michael Cembalest at JP Morgan Asset Management looked at US stock returns going back to 1879. In the past 145 years, there have been ten instances where stocks have climbed more than 20% for two consecutive years.

The table below shows what came after two years of 20%+ returns in the past.

Underneath each year, the corresponding return of the stock market for that year is shown. The two consecutive “20%+ return years” are shown on the left in the regular font, and what happened in the subsequent two years follows on the right in bold font.

Source: JP Morgan

What does history tell us about what comes after two fabulous years of 20%+ consecutive returns?

• In eight of the nine historical instances, cumulative returns in the following two years were lower
• In five instances, cumulative returns, while lower, were still positive
• The three instances where cumulative returns were negative coincided with either recession (1957) or the Great Depression (1929-30 and 1937-38)
• In one instance (1995-1998) returns following the two years of 20%+ consecutive returns were higher

This data suggests that if the US economy avoids recession for the next two years, then there is a good chance that US stock returns will be positive in the 2025-2026 period.

The JP Morgan researcher Michael Cembalest (who compiled the data) has this to say about 2025:

• Expect a 10% – 15% correction at some point in 2025
• In 60 of the past 100 years there has been at least a 10% correction
• In 40 of the past 100 years there has been at least a 15% correction
• US equity markets should end the year higher than they began
• Be sure to have plenty of liquidity to take advantage of what might be a volatile year

Other Voices: four researchers that I respect and follow closely from three firms have made the following comments in their 2025 outlooks:

• Torsten Slok, Chief Economist at Apollo: “Incomes are high, stock prices are high, home prices are high, debt levels are low, interest rate sensitivity is low, and banks are more willing to lend to households. There is significant upside risk to US growth, inflation, and interest rates.”
• Howard Marks, co-founder of Oaktree Capital: “The markets, while high-priced and perhaps frothy, don’t seem nutty to me.”
• Nick Colas & Jessica Rabe co-founders of DataTrek: “We’re sure 2025 will have its share of concerns, but, in the end, we see little that could derail the ongoing move to higher stock prices.”

As we move into the next year, my take on 2025 is:

• Stocks continue to be an important part of the investment portfolio and a good bet for long-term investors
• Return prospects for intermediate-term bond funds have improved as Treasury bond yields have moved up toward 5%
• Inflation resurgence and surprise economic policies from the incoming Trump administration pose the biggest potential risks for financial markets
• While we’re likely to see episodes of stock selling and lower prices in 2025, conditions are not present for the onset of the next bear market
• Portfolio returns are likely to be satisfactory for many investors this year, though probably not as strong as in 2023 and 2024

-RK

The incoming Republican Administration has floated a range of ideas related to taxes – some are more likely to be implemented, others less so.

Changes to tax law must go through the legislative process, and since Republicans will control both houses in the 119^th Congress, substantive change to tax law is likely in 2025.

Also, there are several adjustments to the tax law relating to retirement plans that will go into effect on January 1, 2025.

Possible changes to tax law, and upcoming tax-related changes for retirement plans are discussed below.

Tax Policy Under a New Administration

Many of the provisions from the 2017 Tax Cuts & Jobs Act which lowered taxes for individuals are set to expire at the end of 2025, including: lower individual income tax rates, a larger child credit, higher standard deductions, and the bigger lifetime estate and gift tax exemption.

Tax policy ideas floated by Republicans during the presidential campaign include:

• Make the 2017 tax cuts permanent
• Raise the child tax credit
• Drop the corporate tax rate
• Impose across-the-board tariffs
• End green energy breaks
• Tax-free overtime pay
• Exempt Social Security from taxes

The tax experts at The Kiplinger Tax Letter believe that the last two bullet points (tax free overtime pay and exempting Social Security from taxes) are unlikely to gain enough support to pass Congress.

Current expectations are that Congress will pass a big tax bill in the fall or winter of 2025, with most tax changes starting in 2026.

One potential hurdle to enacting all the proposed tax breaks is cost: if all the changes are implemented, the revenue loss for the federal government is estimated to be about $9 trillion, according to financial magazine Barron’s.

We expect to be sifting through a lot of new information in the months ahead and reporting back to you as we get clarity on changes to the tax situation – especially changes related to individual income taxes and exemptions.

Retirement Plans: Upcoming Changes for 2025

The following key dollar limits on retirement plans are set to increase in 2025.

401(k) Plans

• Contribution limit rises to $23,500
• People aged 50 and older can contribute an extra $7,500
• People aged 60 – 63 can contribute a larger “catch up” of $11,250

SIMPLE IRAs

• Contribution cap rises to $16,500
• People aged 50 and older can contribute an extra $3,500
• People aged 60 – 63 can contribute a larger “catch up” of $5,250

Traditional IRAs

• Contribution cap remains $7,000
• Catch-up for people aged 50 and older is an additional $1,000
• Couples deduction phaseout: Adjusted Gross Income (AGI) of $126-000 – $146,000
• Singles deduction phaseout: AGI of $79,000 – $89,000
• Note that phaseouts apply to people covered by a workplace retirement plan
• If only one spouse is covered by a plan, phaseout for the uncovered spouse is: AGI of $236,000 – $246,000

Roth IRAs

• Contribution cap remains $7,000
• Catch-up for people aged 50 and older is an additional $1,000
• Couples contributions phase out at AGI of $236,000 – $246,000
• Singles contributions phase out at AGI of $150,000 – $165,000

Qualified Charitable Distributions (QCDs)

• People aged 70.5 and older can transfer up to $108,000 from an IRA directly to charity
• QCDs can count as Required Minimum Distributions (RMDs), but they are not taxable and are not added to AGI

-RK

The conclusion of the 2024 election cycle delivered a red sweep, with Republicans set to take control of the White House and the Senate in 2025, while maintaining control of the House of Representatives.

For slightly more than half of American voters, this was the desired outcome.

For many other Americans, though, the election result was unwelcome.

And for those who are philosophically at odds with the people soon to be in power and the policies they promote, it may be deeply troubling.

Susan, Donna, and I understand the anxieties that can come with change, and we share many of the concerns that have been vocalized since the election.

We recognize that there will be periods of time where staying invested in the financial markets might be psychologically challenging.

Also, there likely will be stretches in the months and years ahead where asset prices decline, and portfolio values drop.

These events – policy enactment and market direction – may be causal, or they may be coincidental, and I suspect at times it will be hard for investors to keep clear heads as the situation unfolds.

Remaining unemotional when it comes to your money is always a challenge.

It might help to remember that nearly all individuals are prone to confirmation bias, which is the tendency to interpret new information as confirming one’s existing beliefs.

As investors, we must be extra vigilant to avoid the confirmation bias trap. Taking action in your portfolio that might hurt the probability of your financial plan succeeding over the long term isn’t a recipe worth cooking.

It can be uncomfortable to climb a wall of worry holding a portfolio that contains risky assets, even when we know this is a sound long-term financial decision for most people, under most circumstances.

As fiduciaries, Susan, Donna and I are legally bound to put the best interests of our clients first.

As advisors who care deeply about our clients, we are professionally oriented to work in a collaborative and compassionate manner.

We pledge to continue to approach the financial environment with objectivity, to deliver personalized and accurate financial advice to our clients, and to promote your financial well-being at all times, whatever circumstances may arise.

As we move toward 2025, we hope that the current state of the nation doesn’t weigh too heavily on your overall well-being.

It has been helpful for me personally to remember that there have been times in the past when our country has been starkly divided, and to an even greater degree than it is today.

I have found some comfort in reading Abraham Lincoln’s first Inaugural Address, and especially the following passage, taken from the last few lines:

 “Though passion may have strained it must not break our bonds of affection. The mystic chords of memory… will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.”

Horse racing by actual horses in America may be on its last legs. Aside from big events like the Kentucky Derby, attendance at racetracks is abysmal.

Crowds at Belmont in New York, for example, are down by nearly 90% from four decades ago, according to the End Horse Racing Coalition; tracks are closing; and races are in fewer and farther in between.

However, the horse race for US president is in full stride with record participation likely at the polls.

Terms like neck and neck and down to the wire (relating to equine contests) come to mind when considering the election on November 5^th.

Below are three different methods for forecasting the outcome of the 2024 Presidential campaign: traditional polling; the betting markets; and campaign fundraising.

The Economist forecast, constructed from traditional polling data, which had been giving the leg up to Harris after she entered the race in July, reset to even on October 30, and as of November 3 had moved slightly in favor of Trump (51% to 49%), but essentially shows a statistical dead heat.

Source: The Economist

The Economist forecast lines up with the last New York Times / Sienna College poll conducted from October 20 – 23, which asked the question: If the 2024 presidential election were held today, who would you vote for? The results were: 48% for Trump, 48% for Harris.

However, alternative indicators point strongly in different directions.

The betting markets have been consistently forecasting a Trump win. The website RealClear Polling (RCP) aggregates odds data from betting sites like BetOnline, Betfair, and Bwin, and the November 3 “average” from RCP put the odds of Trump winning at 53.9% versus 44.9% for Harris.

Betting sites are an interesting way to measure sentiment, because their signals are derived from people willing to put their money where their mouths are. Polymarket claims a total of $1.8 billion has been wagered on the 2024 US Presidential election on its platform.

But it is also possible that some big fish are skewing outcomes. In a recent MarketWatch article by Brett Arends (who has covered sports and political betting for decades) the columnist warns: “the betting markets have their own flaws as a forecasting tool and need to be taken with a grain of salt.”

The betting markets also have been quite volatile. As recently as mid last week, Polymarket gave Trump a 67% chance of winning. That’s now down to 52%.

Another money-where-your-mouth-is measure is fundraising, and Harris leads by a sizable margin in campaign fundraising.

The Harris campaign fundraising efforts have outpaced Trump’s efforts by 3:1, according to Federal Election Commission Filings, as reported by Forbes on Oct 25.

And Harris’s campaign set a political fundraising record in the third quarter, bringing in $1 billion in the three-month period that ended September 30.

The majority of both campaign committees’ spending has been on advertising.

Given her cash advantage, Harris has been able to spend more of her time campaigning during the weeks prior to the election in swing states, while Trump has had to allocate time raising money in places where his popularity is high.

We will need to wait until election day (or, if not, hopefully sometime soon thereafter) to see how the money advantage plays out in the polls.

I’ll share a closing thought on the elections related to investing from the folks at independent research firm DataTrek:

“We see the US presidential election as a toss-up and we’re entirely OK with remaining long (owners of) US large company stocks regardless of the outcome. Our mental model is that America is a business as much as it is a country…

No matter which party occupies the White House or controls the chambers of Congress, companies always adapt and continue to innovate and grow.”

In my view, the DataTrek opinion (above) is sound long-term financial thinking and is strong “case for” sticking to a portfolio that supports your long-term financial goals.

-RK

We are now one month away from the next Presidential election, and the race continues to look like it will be very close.

What the Polls Say

The Economist forecasting model, which we’ve been following, has shown no change during the past month. The projection as of October 4 shows Harris leading by 274 electoral votes to 264, with 270 electoral votes required to win.

Source: The Economist

The Economist also keeps a running average of national head-to-head polls, which gives a sense of how the race is progressing. In early September, Harris was ahead 49% to 47%. This margin has expanded slightly in favor of the Democrat, and as of early October was 50% to 46%.

Interestingly, during his previous two presidential campaigns, Trump never led in general-election polling averages. In 2016, he trailed Clinton by four percentage points on election day. In 2020, Trump’s deficit was eight percentage points.

The seven swing states, where the race likely will be decided, remain highly competitive according to the latest forecast from The Economist.

Currently, Democrats seem to have a slight edge in Michigan, Nevada and Wisconsin. Republicans have the lead in North Carolina, Georgia, and Arizona. And Pennsylvania appears to be a virtual dead heat.

Policy Points

While it’s unclear who will be sitting in the Oval Office in mid-January 2025, we can take a closer look at the two parties’ tax and spend proposals to get a better understanding of candidate and party priorities, and the future impact on Federal finances.

The bottom line is that both candidates’ proposals are out of balance (in terms of dollars and cents) and will continue the trend of running large deficits and push the US further into debt.

From what has been revealed so far, the impact on the deficit and debt looks to be less bad under Harris.

The two charts below, courtesy of Michael Cembalest of JP Morgan Asset Management, show the fiscal impact of the tax and spend policies of each candidate.

Harris’ fiscal policies take a standard redistributionist approach, where there are an additional $1.3 trillion of taxes on the wealthy and $2.8 trillion of taxes on corporations over a 10-year period.

This revenue would be used to extend tax cuts for people earning less than $400,000 in income and for a variety of entitlements for families and home buyers.

The Harris tax and spend plans will have about a $1.5 trillion net negative impact on the deficit, compared to the baseline forecast of the Congressional Budget Office.

Source: JP Morgan Asset Management

The fiscal impact under Trump would likely be two to three times worse than under Harris and translate to a $4 trillion net negative impact on the deficit, compared to the baseline forecast of the Congressional Budget Office.

Trump is proposing large tax cuts, including extending all the individual and business tax cuts initiated in 2017 that are set to expire in 2026; eliminating taxation on Social Security benefits; and repealing the cap on the State and Local Tax (SALT) deduction.

Also, further cuts to the corporate income tax rate have been floated. The cuts are to be partially offset by revenue raised from tariffs and a repeal of clean energy subsidies.

Source: JP Morgan Asset Management

Jason Furman, Harvard professor and former chair of the White House Council of Economic Advisors, recently noted that “the first modern presidential race between two candidates with undergraduate degrees in economics hasn’t thrilled economists”.

Both candidates’ plans pose longer-term risks to the US economy by further expanding the Federal deficit, but regarding this measure of risk, the scales are currently tipped toward Trump.

Apart from a widening budget deficit, a major risk under the Harris proposal is that higher corporate tax rates could push businesses to relocate headquarters out of the US to save on taxes.

This activity, known as “corporate inversion”, has slowed meaningfully since the Federal corporate tax rate dropped to 21% from 35% in 2017.

A major risk under the Trump proposal is the re-ignition of inflation from higher prices that are likely to result from tariffs on imports and potential retaliation from other countries.

It is worth noting that estimates of the fiscal impact of the Democrat and Republican policy proposals vary widely.

For example, the Committee for a Responsible Federal Budget, a nonpartisan group that favors lower deficits, estimates an even larger negative fiscal impact from both red and blue party policy proposals than what the JP Morgan analysis shows.

A Republican sweep or a Democratic sweep of the executive and legislative branches would probably result in more caution in the markets, as investors wait to see the scope and speed of enactment of new policies.

But the most likely outcome in the coming election is some kind of split government.

If this were to happen, neither candidate’s proposals likely would be passed into law as currently articulated. And divided government tends to have fewer negative implications for investors.

-RK

Taylor Swift’s mega hit Shake It Off is a decade old this year. Over the course of ten years, the songwriter-musician-performer has gone from sensation to superstar. Her net worth, too, has gone from sensational to off the charts.

In addition to the financial benefits that have accrued to her personally, the demand created by The Eras Tour (149 concerts over 20 months spanning 5 continents) has had a meaningful economic impact. Swiftonomics refers to Taylor’s economic influence.

For example (according to Investopedia) ahead of her six concerts in Los Angeles, the California Center for Jobs & the Economy estimated the tour would result in a $320 million increase to the LA County GDP.

The Center also expected The Eras Tour would increase area employment by 3,300 and local earnings by $160 million.

Despite (or more likely because of) her success, there are haters. Imagine!

Like Taylor Swift, the US economy has been creating jobs and facilitating profits for companies since the last downturn in 2020.

The most recent jobs report, released by the Labor Department on October 4, showed US employers added more than a quarter million jobs in September, “blowing past expectations” according to the Wall Street Journal.

Nonetheless, the US economy still has its “haters”, too.

Bill Dudley, a well-respected economist and former head of the Federal Reserve Bank of New York, had been one of the haters, but has recently shaken off his negative outlook.

Dudley wrote an editorial published by Bloomberg on October 3, where he stated: “I’ve been too pessimistic about the risks of a so-called hard landing (recession) for the US economy” and “a recession remains very much in doubt.”

Dudley went on to highlight the following positives:

• The economy retains considerable forward momentum: “Growth in the second quarter was revised up to a 3.0% annualized rate, and the Federal Reserve Bank of Atlanta’s GDPNow estimate for the third quarter is currently 2.5%”
• The labor market is holding together quite well: “Although the unemployment rate has risen above 4% from a low of 3.4% in 2023, the increase has mainly been driven by rapid growth in the labor force rather than permanent job layoffs”
• Financial conditions have improved: “Although monetary policy remains tight by almost anyone’s standard (interest rates are high), financial conditions have eased massively over the past year (stock prices have soared and bond yields have declined)”

Dudley concludes with the following: “What does this mean for financial asset prices? As I see it, a soft-landing scenario (lower growth but no recession) implies a buoyant stock market.”

I concur with Dudley: a strong US jobs market and declining interest rates are supporting economic expansion and higher stock prices.

Absent a nationwide catastrophe, or an about-face on key government policies, it’s reasonable to expect more of the same in the coming months: more economic growth, more US profit growth, and satisfactory returns from the financial markets.

For those concerned about the potential impact of the presidential election on the economy and financial markets, it may be helpful to consider the following chart that shows the direction of the stock market during US presidential administrations from Roosevelt to Biden, courtesy of Clearnomics.

Source: Clearnomics

The stock market, like the US economy, has experienced long-term growth under both major political parties, and has the propensity to “shake it off” when it comes to dealing with adverse conditions.

It is not the case that the market or economy turns down when a particular political party is in office This is because the underlying drivers of market performance – including economic cycles and company earnings – are far more important than who occupies the White House.

-RK

We are now a little more than two months away from the next US Presidential election. Many of our clients are interested in following the contest, and the Presidential race currently looks like it will be close.

In their US Election 2024 section, The Economist magazine publishes a daily update on the Presidential polls. I like following this format because it’s assembled by a respected organization domiciled outside of the US.

Based on The Economist model, the latest projection, from August 30, shows Harris winning by 274 electoral votes to 264, with 270 electoral votes required to win.

Source: The Economist

From the perspective of the possible impact on personal finances, tax policy marks one of the bigger gaps between Democrats and Republicans.

Many provisions in the 2017 tax law, which reduced taxes, are scheduled to expire in 2026 if Congress takes no action.

Candidate Trump wants the 2017 law made permanent, while Candidate Harris has pledged no tax hikes on those making less than $400,000.

Below are other tax ideas that Harris supports (source is The Kiplinger Tax Letter):

Tax ideas for individuals, supported by Harris:

• Bring back the top 39.6% income tax rate for people making $400,000 or more (currently the top tax bracket is 37%)
• Hike the 3.8% net investment income surtax to 5% for $400,000 earners
• For taxpayers filing Jointly with incomes over $1,000,000, long-term capital gains tax would be imposed at ordinary tax rates up to 39.6% (44.6% with the 5% Net Investment Income tax added in); for separate filers, the income breakpoint is $500,000
• Tax unrealized gains upon death, with capital gains and losses reported on the decedent’s final income tax return, with a $5 million lifetime gain exclusion
• Apply a 25% minimum income tax on the ultrarich (those with $100 million in wealth); this tax would apply to unrealized capital gains
• Bring back expansions to the child credit: boost to $3,600 per child (from current $2,000), with monthly payments and full refundability
• A new one-time credit of $6,000 per child claimed in the first year of the child’s life
• Give first-time home buyers a credit of up to $10,000
• Allow more people to get credits for buying health insurance through the Health Insurance Marketplace
• Make tipped income tax free

Tax ideas for businesses, supported by Harris:

• Raise the 21% corporate tax rate to 28%
• Increase the 15% alternative minimum tax on large corporations to 21%
• Quadruple the 1% excise tax on stock buybacks by publicly held firms

It’s likely that additional tax ideas will be floated by both campaigns in the weeks ahead.

It’s also important to recognize that, regardless of who becomes 47^th US President, the composition of the House and Senate will be critical in determining which policy proposals actually become law.

-RK