The past few weeks have been a stressful time for all Americans, regardless of political views. With the 2020 election came uncertainty, contention, and polarization. But while many individuals felt this strain, your investments likely did not. You may be wondering why the stock market is experiencing such highs at this time and if you can expect the highs to continue.
While Biden has been named the president-elect, close poll results and the suspicion of fraudulent ballots has Trump pushing for legal action and recounts. With this continued uncertainty, it’s surprising to many that the markets rallied. Taking a closer look at the projected election outcome could explain why.
Prior to the election, polls were showing the possibility of Democrats sweeping the House of Representatives, the Senate, and the Presidency. If such a sweep had occurred, the markets may have reacted differently. But as it currently stands, investors are anticipating the sort of gridlock that results from a divided government. Investors believe that with the Republicans controlling the Senate, Democrats will not be able to push through many of the policies that they had planned. The divide will limit the ability for Democrats to approve massive spending on economic stimuli, green jobs and infrastructure, tax hikes on business, capital gains and the wealthy, and a healthcare overhaul that includes a public insurance option.
Another reason for the performance of the stock market is due to the anticipated stimulus action. With the election over, both political parties will be forced to undergo serious negotiation. Compromise will likely be key in these debates as neither party has a clear election result.
So, will the markets keep it up? It’s unlikely.
The bottom line is that there is still a lot of uncertainty out there. History shows that a contested election can lead to market volatility. In the 2000 Bush-Gore presidential race, the markets struggled during the following month of recounts and uncertainty. There still is a chance that the current election is not over. With Trump suing multiple states and recounts being ordered in states where vote counts were close, there is a chance we see some volatility. Experts have predicted that in worst-case scenarios, we could see a 10% or more drop in the markets if the election turns into a legislative or judicial battle.
There is also still a chance for a Democratic Senate. Both Senate races in the state of Georgia will be decided on January 5th. In Georgia when an incumbent seat remains short of 50% of the vote, they vote again. If the Senate were to turn blue, then we could see the markets react less positively as they brace for increased regulations and higher taxes.
This said, there is no need to panic. The markets have a way of recovering from volatility. After the few months following the 2000 election, the markets recovered fairly quickly. With the potential downturn, if the Senate gets claimed in January on the horizon, it’s important to remember that investments are long-term and there are many strategies you can implement to protect you from increased taxes. Creating custom-based financial plans that minimize your taxes is something we are incredibly passionate about.
This has been a turbulent time for everyone. Between COVID-19 and the election, there is a lot of uncertainty. No matter how solid you think your retirement plan is, now is a great time to re-evaluate and update accordingly. There is still a probability for taxes to increase under a Biden presidency and beyond. Creating a tax-free retirement plan can help protect your savings. We specialize in creating plans that minimize our clients’ retirement income taxes. For a free consultation, please call (716) 906-8121.
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