The Contenders: Election 2004

DeReuter says Kerry is considering raising the maximum amount of income on which FICA taxes can be levied from the current $87,900 to $120,000. Another Kerry proposal that shouldn’t be overlooked is his plan to eliminate a domestic company’s ability to defer taxes on its foreign income. Instead, Kerry plans to “provide a special one-year 10% tax rate for overseas profits that are reinvested in the U.S. under a domestic reinvestment program,” DeReuter explains. “So for one year, Kerry would lower the corporate tax rate 1%, and use those savings to lower the overall corporate tax rate to 35%.”

On the corporate side, Kerry would cut the top rate to 33.25% from 35%, and provide a new jobs tax credit for manufacturing and industries affected by outsourcing, DeReuter says. Bush “has lent tacit support” to the Foreign Sales Corporation Extraterritorial Income Act, which is called the corporate tax bill in the House (H.R. 4520) and the jobs bill in the Senate (S. 1637). There are “major differences” between the House and Senate bills, but H.R. 4520 “would cut the corporate tax bill for small corporations to 33%, and expand the corporate AMT exemption for small business,” DeReuter says. It’s unclear if Congress will pass the bill this year. “The pressure to get [the bill passed] is being driven by European Community sanctions on U.S. products that are exported,” DeReuter explains. “Currently, the sanctions are at 11% and will rise 1% each month until Congress can repeal what used to be called the Foreign Sales Corporation regime, but it’s actually called the Extraterritorial Income regime. The sanctions are starting to hurt domestic manufacturers that export, and multinational corporations.”

Who’s Best?

The age-old debate of which political party is better for the markets lives on. Most studies have shown that the stock market performs better under a Democratic President, while bonds flourish under a Republican one (see “Who’s Better?” sidebar, below). If Kerry wins, “the market assumption is that we will have a higher-tax, more-protectionist, lower-growth environment, which would result in lower inflation and lower interest rates. So bonds win,” says Golub with JPMorgan Fleming. A Bush win, on the other hand, means a “more aggressive environment, with a higher deficit–which would be inflationary, faster economic growth, and less protectionism, [so] interest rates rise and bonds lose relative to equities.”

As it stands now, the market is anticipating a Bush victory, and he is ahead in the polls, Golub says. In April, Bob Doll, president and chief investment officer of Merrill Lynch Investment Managers, predicted in his “What’s Ahead in 2004″ investment report that “the Republicans will hold the White House and Congress, but probably not by enough to push through all of the items on the GOP’s wish list.”

If there is a last-minute shift in the outcome, and Kerry wins, investors “may think about allocating stocks to bonds and allocating differently with respect to very specific stock and sector issues.” For instance, everyone predicts pharmaceutical stocks would do poorly under a Kerry Administration, but it’s Kerry who would “likely move forward stem cell research, which would be great for biotech” companies. “So you may see a rotation away from very specific names or small groups of stocks” if Kerry wins, Golub says.

As for the economic outlook, Federal Reserve Board Chairman Alan Greenspan told Congress in September that the U.S. economy has edged up since tailing off in late spring. But Greenspan warned Congress that the “outlook for oil prices remains uncertain.” Skyrocketing oil prices, fears of terrorism, and angst about the Presidential election are keeping investors at bay for now. All of these variables are eroding advisors’ confidence as well, according to a recent Advisor Confidence Index survey performed by AdvisorBenchmarking.com, a division of Rydex Investments. Jim Elder, a planner with ElderAdo Financial in Montrose, Colorado, says the stock market is “in a wait-and-see attitude until visibility is clearer with the Presidential election, energy prices, interest rates, corporate earnings, and terrorist threats.” Ted Feight, a planner with Creative Financial Design in Lansing, Michigan, says he’s “started using more index stocks and putting stops on them in case of a terrorist attack just before the election.”

Ron Keleman, a planner with The H Group, Inc., in Salem, Oregon, is telling his clients not to bet their portfolio on a certain election outcome. “Too many other factors affect investment results,” he says, “and elections can be unpredictable.” Golub of JPMorgan Fleming agrees, arguing that, “At the end of the day, I don’t think the [election] outcome is as important as we’d all like to think it is. Americans create wealth and profit, not the people in Washington D.C. by setting policy.”

Stricter or Looser?

What about the regulatory environment under Bush and Kerry? William Donaldson, chairman of the Securities & Exchange Commission, was appointed by Bush and has been credited with turning around the embattled SEC, unleashing a bevy of new rules to reign in a scandal-ridden mutual fund industry, corporate wrongdoers, and hedge fund managers. Investment advisors have been on the receiving end of Donaldson’s regulatory crusade. If Bush goes, you can bet Donaldson will resign. If Kerry wins, he’d likely appoint a new chairman, and Donaldson would have to fill out his term as a commissioner, not as chairman. But would Kerry be able to pony up a suitable candidate to replace Donaldson? As with the outcome of the election itself, we don’t yet know the answer.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].