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Now that Barack Obama has been elected the next President of the United States, the nation's inboxes, airwaves, and TV screens are awash with advice and predictions from economists, regulators, political pundits, Wall Street veterans, and investment advisors about what issues Obama should tackle first, and where the nation is headed now that he's the leader of the free world.
Indeed, many agree with President-elect Obama's stance that fixing the economy should be at the top of the new administration's list. Although he faces a daunting task, Obama is already moving to shore up the flailing economy before he's sworn into office. All eyes are also on who Obama will select to be Secretary of the Treasury to implement the financial rescue package's Troubled Asset Relief Program (TARP); no choice had been made as of press time, though bandied about have been the names of Lawrence Summers, a former Treasury Secretary under President Bill Clinton; Timothy Geithner, current president of the New York Federal Reserve Bank; and former Federal Reserve Board Chairman Paul Volcker (another reported contender, former Clinton Treasury Secretary Robert Rubin, announced November 6 that he was not interested in returning to government).
The day after Obama's election, the markets dropped more than 400 points and were still volatile at press time, but history shows that the first-year total annual returns for the S&P 500 have skewed higher when a Democrat wins the Presidential election, according to a nearly 60-year analysis of S&P 500 returns by members of the Zero Alpha Group (ZAG), an international network of fee-only financial advisory firms. However, ZAG warned that what an investor gains in the stock market under a new President might end up being surrendered through tax increases.
Data generated by Savant Capital Management of Rockford, Illinois, and three ZAG members firms--Resource Consulting Group of Orlando, Florida; Carlson Capital Management of Northfield, Minnesota; and Foster Group of West Des Moines, Iowa--noted that, since 1948, in the first year after an election, the S&P 500 has gained 15.8% under a Democratic President as compared to 11.2% with a Republican in the White House. In fact, the firms found, "six of the seven first full years after the election of a president since 1952 to have had negative returns featured Republicans in the White House starting a first or second term in office, including -11.88% for Year 1 of George W. Bush's first term, -14.66% for the start of Richard Nixon's second term, and -10.78% for the initial year of Dwight Eisenhower's second term. Only George Herbert Walker Bush escaped this first year 'jinx' among Republican presidents, while Jimmy Carter at -7.18% was the lone Democrat to see negative stock market returns in the first year."
But ZAG points out that Obama's tax plans could, if implemented, "more than offset any difference in stock market returns, particularly for higher income investors." While Republican presidential nominee John McCain wanted to extend the Bush tax cuts, freeze capital gains and Social Security taxes at current levels, and make "estate tax provisions more generous," ZAG notes, Obama has proposed raising income taxes on higher-income individuals--those earning more than $250,000--increasing capital gains taxes for the same group, raising the Social Security tax income ceiling, and providing for "estate tax provisions less liberal than those proposed by McCain."
The Advisor View
Kimberly Sterling, president of Resource Consulting Group, says that "the bottom line is that investors who have a long-term investment plan should stick to it and not speculate based on the outcome of the election. Any 'White House effect' that may happen based on who wins is just one way of looking at the data about what the market does." The best course of action, "is to get on the passive investing bandwagon keeping your costs and taxes as low as possible. Now is the most important time to remain disciplined and avoid being emotional about investing for your future."
High-net-worth individuals and small businesses are already moving to minimize tax hits that would take effect with an Obama administration, says Phil Tortorich, a partner at the Chicago law firm Katten Muchin Rosenman LLP. "The general view of Obama's policies with a Democratic Congress in power is one of fewer exemptions and higher tax rates on high-net-worth individuals and business owners," Tortorich says. Individuals, he says, are "most immediately" looking to minimize estate taxes. Obama would make the estate tax permanent, with a $3.5 million exemption (the level it is now scheduled to reach in 2009) and a 45% maximum rate (the level applying from 2007 to 2009). "Individuals with appreciated assets (or low-basis assets) could also be impacted by the new president as details of his proposal on capital gains taxes show a hike to 20%," Tortorich says. "Here again, many clients are already considering methods of intentionally incurring capital gain now in order to lock in the 15% long-term capital gains tax."
For a small business owner with an S corporation, Tortorich says that "all of the business income passes through to the individual's return and is taxed by the individual even if no distribution is made by the company." Moreover, he says, Obama has "discussed increasing payroll taxes, which will also increase the cost of running a successful business."
As for where the economy is headed, Ric Edelman, founder of Edelman Financial Services in Fairfax, Virginia, is "very optimistic about the next 10 years." Obama, he says, "has indicated he is going to support and sustain the financial rescue plans that are underway--that's essential." If Obama follows through, "we will work through the current economic challenge and we will see substantial prosperity over the next five to 10 years," Edelman predicts. RydexAdvisorBechmarking's Advisor Confidence Index, which measures advisor confidence in the stock market and economy, sank to 79% in October--the lowest level in the index's four-year history, down almost 20% from August. Maya Ivanova, market research manager with RydexAdvisorBenchmarking, says that "many advisors agree that while there will be more volatility to come, opportunities are out there." Also, she says, most of the advisors commenting in Rydex's latest poll "expressed support for the financial bailout the government has designed to put confidence back into the system--two in three advisors believe the government's Wall Street rescue plan will work."