We’re heading into the home stretch of the “most important election of our time” this November, which has heated up campaign rhetoric over the last few weeks. Of course, I put that phrase in quotations because every election is billed as that, but I digress. For this newsletter, I want to examine some recent policy ideas from both candidates. I say “ideas” because some of these proposals seem to have been made on the fly without many details on how they would work in practice.
First, former President Trump and Vice President Harris have proposed tax-free tips. While this sounds simple, it gets complicated when you think about it more. People who work for tips usually don’t pay much in taxes because they don’t earn much. The real question is whether tips would still count toward Social Security and Medicare taxes. If they don’t, it could reduce how much these workers receive in Social Security when they retire. Another concern: if a worker earns $30,000 with half of that in tips, should they pay less tax than someone else who earns the same amount in a regular salary? And what if someone with a high-paying job, like a lawyer charging $200/hour, suddenly starts getting $200/hour in “tips”?
Vice President Harris has also discussed banning price gouging in the food and grocery industry. This has grabbed attention, but it’s unclear how it would work. Some people think it could lead to price controls, but that’s probably not going to happen. The last time the government tried price controls was in the 1970s, and it didn’t go well. It’s more likely that Harris’s proposal would be similar to current bans on price gouging as the one President Trump signed in 2020 to stop hoarding during the pandemic. Either way, this is unlikely to make much of a difference in controlling food prices.
Trump has also promised to help seniors by eliminating taxes on Social Security benefits. Currently, individuals don’t pay taxes on Social Security if they make less than $25,000 (and 50% of benefits above that level aren’t taxed,) but higher incomes can be taxed. While this sounds like a win for seniors, it could reduce the funds available for the Social Security Trust Fund and increase the federal deficit by about $1.6 to $1.8 trillion over the next decade.
Harris and Trump have also proposed increasing child tax credits (CTC). Harris wants to raise it permanently to $3,600 per child, similar to what we saw temporarily in 2021, and also add a $6,000 credit for new parents in their baby’s first year. Trump’s team is even considering a $5,000 CTC for everyone. While these ideas sound helpful for families, they come with a hefty price tag and would likely increase the federal deficit as well.
One important thing to remember: many of these proposals may not make it far in Congress. In the upcoming elections, control of Congress and the presidency are up for grabs. The presidency is basically a toss-up based on forecasts from the prediction market, Polymarket. However, Democrats have a 63% chance of winning the House, while Republicans are favored to take the Senate (75%). If this happens, we could have a split Congress, making it harder to pass significant legislation. Even if one party controls both chambers, extensive policies often need a two-thirds majority in the Senate to avoid a filibuster, which is challenging to achieve. However, changes to tax policy, which will be a big issue next year, could be passed with a simple majority through a process called “reconciliation.”
One big concern is that the tax cuts passed in 2017 are set to expire at the end of 2025. If they aren’t extended, taxes for individuals could go up in 2026. Renewing these cuts could add $4.6 trillion to the federal deficit over the next decade, but Congress will likely focus on this issue since 2026 is an election year.
Tax policy could significantly impact investors. If Harris wins, one risk is that corporate taxes could go up, though this is unlikely if Republicans control either the House or Senate. If Trump wins, he’s likely to extend the 2017 tax cuts and might even lower the corporate tax rate to 15%. However, he may also bring back tariffs and trade wars, which could hurt the economy, as in 2018.
Both candidates are making promises that lean into populism while focusing on increased deficit spending. While this could lead to more corporate profits, which is beneficial for markets, it also risks fueling inflation. The good news is that inflation has been falling, and the Federal Reserve has started to lower interest rates. Combine that with the potential for higher government spending, which could create favorable conditions for the stock market next year. However, the longer-term implications of all the proposed deficit spending are hard to predict.
Quick Market Update
We have had an excellent year in stocks, with the S&P 500 up over 20%. But investors beware; the market is typically volatile before an election as uncertainty surrounding the eventual winner causes a pause in “the animal spirits.” However, historically, the post-election months tend to be strong for markets as companies and investors adjust to the president-elect’s policies and agenda. So, what does that mean for you? Hopefully, nothing! Stick to your long-term plan. Don’t let days or weeks of volatility ruin the decades you have in front of you. And if you don’t have a plan, now is the best time to talk with someone and make one.
One last thought on predictions. I’ve written about it in the past, but making end-of-year predictions is a folly that I love pointing out. Chart 1 shows the year-end price targets the most prominent investment houses put out before the start of the year for the S&P 500. On average, they predicted the index would finish at 4,861. As of September 23rd, the S&P 500 was at 5,719, over 300 points above the highest prediction listed.
S&P 500: Wall Street's 2024 Year-end Price Targets vs. Current Level
(Target data via Bloomburg in Dec 2023)
CHART ONE: Source – Charlie Bilello, Creative Planning.
If you have any questions or your financial situation has changed (beneficiaries, income needs, investment objectives, time horizon, risk tolerance, etc.), don’t hesitate to contact our office. Stay safe.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
All performance referenced is historical and there is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investing involves risk including loss of principal.
No strategy assures success or protects against loss. The economic forecasts set forth in this newsletter may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
