Precarious
As the heatwaves from summer pick up enough chill to bring comfort to the shorter days of fall and the hurricane season leaves us with two deposits of junk giving us at least two points of “cleanup and repair” GDP going into the fourth quarter, we stepped gingerly forward with more potential excitement bottled up in Halloween, the election, Thanksgiving, Christmas, and New Years. The big economic event, of course, is the election which arrives in a couple of weeks and at a time when the market is highly priced. In fact, with the stock averages at an all-time high and the economy bumping along, one could easily call it overpriced. The stage is well set for perhaps the most consequential election in our country’s history.
The consequences, of course, are coming from election opponents. One candidate offers to govern with a growth agenda featuring tax cuts, protective tariffs, and deregulation. This outlook would probably result in a net positive market environment because of the tax cuts and deregulation. The tariffs are yet to be defined, and they could become a problem if President Donald Trump becomes too heavy handed in application.
Kamala Harris has not yet clearly outlined her economic plan, but she has advocated for a 50% corporate income tax hike, at least a 50% capital gains tax hike, and a much higher priced personal tax rate. Additionally, she wants to tax unrealized gains at a 30% tax rate. The latter has not been explained but it is really a form of wealth tax.
She also wants to ban all private health insurance in favor of one public health plan, so Americans will lose all healthcare options except the one public plan.
Additionally, her plan uses reparations (goodies or giveaways) in the amount of $7 trillion. The list changes daily, but it represents gifts to minorities and lower income Americans, and higher income taxpayers will pay for these gifts. Clearly, it’s a plan of redistribution for Americans. The government will pick the winners and the losers going forward.
Looking at the election, the worst combination of outcomes could clearly put our markets down and open the doors to an economic depression similar to the 1930s. The worst combination of outcomes would be a Democratic sweep, or a Kamala Harris White House combined with a Democratic Senate. If that were the case, you could count on a restructuring of the Supreme Court and a rule change in the Senate throwing out the filibuster rule. The destabilizing effect of these changes will go a long way toward ruining the credibility of the United States. None of this will be good for markets.
A Republican sweep on the other hand will feature tax cuts which should further boost corporate earnings.
We will have to analyze tariffs that are forthcoming in order to avoid companies and industries that would be in harm’s way.
In the event of a Democratic sweep, there will be an added incentive to take profits this year before higher income and capital gains taxes come into play next year as promised.
Obviously, there will be many portfolio strategies put into play by the election. The only guarantee here is that the markets will be very volatile. We are prepared to act as quickly as we can with any result.
The global landscape also presents a high-risk environment with two wars being fought and a third being threatened. Russia’s invasion of Ukraine is in its second year and Israel continues to retaliate and punish states in the Middle East who have attacked Israel. China threatens to attack Taiwan in a move to reconsolidate that country into the Chinese Nation, but so far, it’s only a threat.
While we are supporting Ukraine and Israel and promising to support Taiwan, we are doing so on a shrinking defense budget, leaving some of our defense establishment weathered and vulnerable. This is another consideration of risk for the market to contend with and the Republican answer to this is to strengthen our military capacity. Our financial capacity is at a low ebb, so a more robust military budget must be carefully assembled.
We have already been watching a financial highwire act as the Federal Reserve has been trying to fix our inflation problem. Already, it’s a bit precarious before the election. There are some who believe we’re already in a recession, while most think we’re close, but not in one yet.
Much recessionary opinion revolves around the employment numbers and a strong set of relative employment numbers will negate other recessionary signals. This time, however, the employment numbers include several million immigrants, so comparisons with past experiences are “iffy,” at best.
Looking forward, we see change coming, but we have no certainty of direction or degree of change. We do plan on staying close to the real world and making adjustments to your investment portfolio that makes sense. The two sides are so radically different that there will be change.
