Welcome to the November Edition of Top of Mind!
Politics is an emotional topic, and as financial advisors, it’s not always the easiest conversation! But when Washington affects your money, it’s our job to address it.
This month, we’re focusing on how the election results may impact your finances. You might not agree with every point of our analysis, and that’s okay. We’re all in this together, with only one goal in mind: maximizing your financial well-being.
We’ll explore three key areas: your pocketbook, the markets, and portfolios. Our aim? To see the “forest for the trees” following a contentious election season.
Pocketbook
Taxes are the most direct way politics influences your finances. The current tax rates, enacted in 2018 under President Trump, are set to reset higher in 2026 unless Congress acts. Here’s a quick comparison of current brackets versus past (and potential future) brackets:
Trump’s re-election makes it likely that today’s income tax brackets will be extended or even made permanent. The same goes for capital gains taxes and the current estate tax exemption, which doubled in 2018 to more than $13 million per individual ($26 million for married couples).
The standard deduction, raised in 2018, is also unlikely to change meaningfully. One potential shift is the State and Local Tax (SALT) deduction, which was lowered in 2018 and might increase again.
On the other hand, there’s always the possibility that the 2018 brackets will expire as originally planned, which underscores the importance of planning for either outcome.
Other campaign topics affecting your pocketbook include credit card interest rates, energy costs, healthcare, Social Security taxes, student loan relief, private school vouchers...and more! We’ll have to wait and see which proposals become law.
Tariffs are another hot topic. Will they raise prices at the store? Possibly—but it depends on how they’re applied. Broad tariffs could raise prices across many goods, while targeted tariffs might be used to negotiate trade deals. During Trump’s first term, inflation remained modest despite tariff implementation, and we’ll be watching to see if that holds true again.
Markets
Looking at the stock market, we have history to go from. Stocks performed well during President Trump’s first term, and, indeed, we are positive on the outlook. However, there’s no guarantee that Trump’s second term will mirror his first for the markets.
To this end, we’ve identified one opportunity, two wild cards, and one risk to the outlook.
Opportunity: “Animal Spirits”—A pro-business agenda with deregulation and potentially lower corporate tax rates could spur risk-taking by executives and small businesses. Increased spending, mergers, acquisitions, and hiring should create a favorable environment for stocks.
Wildcard #1: Deficits—The federal budget deficit was 3% of GDP at the start of Trump’s first term and is now closer to 6% (source: Federal Reserve). This limits room for tax cuts or spending increases. The newly announced Department of Government Efficiency (DOGE) adds intrigue to how this issue will be addressed.
Wildcard #2: China—During Trump’s first term, China was unprepared for a trade war. Now, they’ve had time to strategize. Would a second trade war play out similarly to the first?
Risk: Valuations—Stock market valuations are a bit elevated following 2024’s run-up. At the start of Trump’s first term, the S&P 500’s P/E ratio was around 23x. Today, it’s closer to 28x (source: Morningstar). Elevated valuations pose a risk regardless of political leadership. However, if the economy and corporate profits continue to grow, elevated valuations shouldn’t prevent further stock market gains.
Portfolios
Investing based on election outcomes is notoriously tricky! Economic forces can completely overshadow regulatory changes in Washington, making them moot.
That said, we made one portfolio adjustment after the election: shifting from international small-cap mutual funds to U.S. small-cap funds. The rationale? Foreign small caps face greater risks from potential tariffs and trade barriers, while U.S. small caps are more centered on the domestic economy.
We’ll continue to evaluate the landscape and consider additional changes as needed. Likewise, the mutual fund managers in your portfolio are actively searching for companies that stand to win or lose in Trump’s second term.
Closing Thoughts
It’s easy to overestimate the impact of elections on the stock market. Historically, U.S. stocks have thrived over decades, regardless of the party in power. That’s because, at its core, investing is about companies—not Washington. Companies adapt, innovate, and thrive. No matter an election outcome, we expect that to continue, and for the stock market to continue to generate wealth as it has for generations of Americans.
Thanks for reading this month’s Top of Mind! We’ll be back next month, hopefully with a lighter topic! As always, if you have any questions, we’re just a phone call or email away.
Have a Joyous Thanksgiving!
Warm regards,
The Carlson Group