Post Election Thoughts
Submitted by Grunden Financial Advisory, Inc on November 7th, 2012Done. After countless hours of campaigning and millions of dollars spent running ads, Barak Obama will remain the 44th President of the United States of America. It was a hard fought battle but the campaign did what it was supposed to do: show Americans two differing views of the future. Citizens went to the polls in mass force yesterday letting their voice be heard. There is no other country where you have the opportunity to bring in new leadership without the need to fire a single bullet…democracy at its finest!
Grunden Financial Advisory, Inc. views Obama’s victory as neutral for our clients as it relates to their investment plan and portfolios. Capital markets still work and will find a way to reward those who accept more ups and downs in their portfolios over the short time. We expect to see Obama carry out campaign promises, but at the same time realize some may be tempered since Congress needs to also approve bills before they become laws. We expect the gridlock experienced the last two years to continue. The largest issue, highlighted many times by both candidates, is the economy.
The most pressing obstacle facing the economy right now is the fiscal cliff, as indicated by the over 300 point sell off in the market this morning. This refers to the fact tax rates will reset to 2001 levels beginning January 2013 if nothing is done. Congress has the power to rectify this, but there are competing plans from the House (wants to hold all tax rates the same) and Senate (wants to raise taxes on incomes above $250,000). Now that Obama has secured the next four years, we believe he’ll push the Senate’s plan as at least a temporary stopgap measure.
Here is what we expect to see:
- Revive U.S. Manufacturing. By trying to stem the outsourcing of jobs overseas, Obama intends to keep manufacturing jobs here in the U.S. He also hopes to substantially “build on our manufacturing boom” which if successful, should help create jobs and keep profits in the U.S.
- Energy independence. We expect to see less drilling in the US and more push towards green energy in order to lessen our dependence on foreign oil. Creating new jobs in a new field may prove difficult if real demand isn’t there. While it’s true the Obama administration is approving fewer drilling permits, thankfully (due to advances by private companies in the oil extraction industry) the ones approved have been highly successful.
- Deficit Reduction. A reduction of government spending will allow the nation to focus on paying down the debt. However, we are not confident the U.S. deficit will be reined in when factored with the existing and proposed expenditures, like the recent health care legislation.
- Social Security. Neither candidates spoke much about Social Security, but this program needs to be addressed quickly. The Social Security trust fund runs out of cash in 2017 and runs out of bonds in 2032. The Administration currently has no comprehensive plan to address Social Security’s financial problems exists, a program which accounts for over 20% of the U.S. Government’s annual spending and is expected to increase.
- Taxes. Look for higher tax brackets for individuals making over $250,000 and lower tax rates for corporations. This will have a direct impact on our clients and if pushed forward, many will realize a tax increase. In addition, there will be a push to lower the estate tax exemption amount from just over $5 million as it is today, to $3.5 million AND increase the estate tax from 35% to 45%. This tax would be imposed on estates above the proposed exemption amount of $3.5 million per person (married couple’s exemption would be $7 million). The capital gain tax is expected to increase from 15% to 23.8% for families with incomes over $250,000. Proposed Obama tax brackets:
Current Tax Brackets |
2011 Tax Brackets (what rates will be 1/1/13 if Congress doesn’t act) |
Proposed Obama Tax Brackets |
10% |
15% |
10% |
15% |
15% |
|
25% |
28% |
25% |
28% |
31% |
28% |
33% |
36% |
36% |
35% |
39.6% |
39.6% |
Capital markets work as evidence there is just as much traffic on major thorough fares as yesterday. People still get up and go to work. People will continue to earn a living to provide for their families. Sporting events will occur right on schedule. Tee times will be set and movies will be watched. The economy, and life, will go on. Change your investments considering the election outcome? No, not as a result of the election. Your investment plan directs your portfolio approach. Review your investment plan and strategy that is driving us on your behalf? Only if you have been completely unnerved by the ups and downs in your portfolio over the last year. If you hold outside investments and make over $250,000, please contact us to evaluate capturing the 2012 15% tax rate instead of the 23.8% tax rate beginning 1/1/13. Grunden will continue to assess the higher gains tax within the portfolios we manage and will make a call between now and the end of the year on if we want to capture gains for the sole purpose of using the lower 2012 capital gains rate.
The economy has prospered under both Democratic and Republican leadership and a lot rides on the private sector, which along with consumers, is the main driver of the economy. There is still no other place in the world which presents the best opportunities for all and rewards those who take risk and create opportunity. We will continue to keep you posted on latest developments which may impact you.