The blue ripple
With Georgia’s senate races now behind us, Democrats now control both chambers of Congress and the White House. The new Senate will be evenly divided between Republicans and Democrats but, by the narrowest possible majority, Democrats will have control given Vice President-elect Kamala Harris’s tie-breaking vote. Similarly, Democrats lost seats in the November elections and now hold a razor-thin majority of only 10 seats in the House of Representatives. While President-elect Biden’s election victory over President Donald Trump was more decisive (306-232), he nevertheless assumes command of a divided nation that’s been wounded by the insurrection at the Capitol and a bitter election. Democrats’ anticipated blue wave has become, by any measure, little more than a blue ripple.
Policy implications
Forget the campaign rhetoric. The reality remains that, despite Democratic control of the Senate and House, the prospects for major regulatory changes remain quite low. With the Senate and House almost evenly divided, centrists have significantly more clout than would otherwise be the case had there been a more decisive “blue wave,” as many Democrats had hoped. It should come as no surprise that the Congress nearly perfectly mirrors the division of the American electorate. Subsequently, moderates from both parties, such as Joe Manchin of West Virginia and Sue Collins of Maine, will likely act to temper any attempts to enact major policy changes. Further, major policy changes, for example an increase in taxes as promised by President-elect Biden while on the campaign trail, require a supermajority (67 senators) to pass the Senate. Even less sweeping legislation would still require a minimum 60 votes to overcome the filibuster. That said, investors would be wise to still expect at least some regulatory changes, albeit relatively minor ones. For example, some changes might include somewhat higher marginal income tax rates at the upper end which may, in part, be partially offset by the reinstatement of certain itemized deductions (e.g., the deductibility of state and local income taxes). However, given the make-up of the new Congress, major changes to estate, dividend, and capital gains taxes are likely off the table.
There are also areas where both parties are likely to agree. With interest rates at historic lows and the nation struggling to combat the economic impact of COVID-19, there’s bipartisan support for a large infrastructure package that would also likely include increased spending on education (Democrats have argued any definition of infrastructure should include human capital, not just physical capital). Such new spending will provide yet another powerful tailwind for financial markets, especially stocks, but will also add to the nation’s ballooning federal debt. Finally, neither party is happy with the current state of “Big Tech,” especially social media companies such as Twitter and Face Book. The prospect of new anti-trust legislation, the repeal of specific legal protections (e.g., Section 230), or increased regulatory oversight all seem quite likely.
Investment implications
Over the past nine decades, the United States has faced contested elections, impeachments, wars, economic and geopolitical crises, and even terrorist attacks. Our system of government, regardless of party control, has managed to work through these and other challenges to our democracy and economic well-being. And through it all, the S&P 500 delivered a compound annual return of 9.9% to investors. Overall, markets were positive in 73% of all calendar years since 1928. The only reliable conclusion one can draw from market history is that, despite which party controls the White House or Congress, markets continue to be reliable venues for building wealth over time.
Exhibit A: Markets rise over time, regardless of party control of the White House.
Source: Dimensional Fund Advisors, Inc.
Exhibit B: Markets rise over time, regardless of party control of Congress.
Source: Dimensional Fund Advisors, Inc.
The road ahead
None of this is to say that markets won’t be volatile over the next few years; of course they will, just as they have under prior administrations and Congresses. The great thing is that there are time-tested risk management strategies for reducing the impact of market volatility and regulatory changes on your portfolio. The first, and most obvious, is portfolio diversification. The real lesson of 2020 for investors is that diversification worked when it was needed most, first during March’s brutal bear market sell-off and again in the fourth quarter’s venomous election when market leadership rapidly rotated out of technology stocks and into small cap, value, and emerging market stocks—all of which were previously unloved asset classes.
The second and perhaps less obvious strategy for managing regulatory risks is proactive wealth management, especially with respect to taxes and estate planning. Working with a trusted advisor, one with a deep bench of highly trained in-house tax attorneys, CPAs, and other experts, can make all the difference in the world when it comes to protecting you and your family from changes to tax or estate laws. Proactive, ongoing planning isn’t just achieving goals—it’s also about managing those risks that present a very real threat to those goals, whether those risks be market, tax, or legal in nature.
Exhibit C: Market leadership rotated in during the fourth quarter.1
Home » Insights » Investing » Democrats Won the Senate. Now what?
Democrats Won the Senate. Now what?
Donald Calcagni, MBA, MST, CFP®, AIF®
Chief Investment Officer
Summary
With Democrats now in charge of both the Senate and the House, many are wondering what implications this will have on regulatory policy and investing. Even with this control, the prospects for major regulatory changes remain quite low. With the Senate and House almost evenly divided, centrists have significantly more clout than would otherwise be the case had there been a more decisive “blue wave,” as many Democrats had hoped.
The blue ripple
With Georgia’s senate races now behind us, Democrats now control both chambers of Congress and the White House. The new Senate will be evenly divided between Republicans and Democrats but, by the narrowest possible majority, Democrats will have control given Vice President-elect Kamala Harris’s tie-breaking vote. Similarly, Democrats lost seats in the November elections and now hold a razor-thin majority of only 10 seats in the House of Representatives. While President-elect Biden’s election victory over President Donald Trump was more decisive (306-232), he nevertheless assumes command of a divided nation that’s been wounded by the insurrection at the Capitol and a bitter election. Democrats’ anticipated blue wave has become, by any measure, little more than a blue ripple.
Policy implications
Forget the campaign rhetoric. The reality remains that, despite Democratic control of the Senate and House, the prospects for major regulatory changes remain quite low. With the Senate and House almost evenly divided, centrists have significantly more clout than would otherwise be the case had there been a more decisive “blue wave,” as many Democrats had hoped. It should come as no surprise that the Congress nearly perfectly mirrors the division of the American electorate. Subsequently, moderates from both parties, such as Joe Manchin of West Virginia and Sue Collins of Maine, will likely act to temper any attempts to enact major policy changes. Further, major policy changes, for example an increase in taxes as promised by President-elect Biden while on the campaign trail, require a supermajority (67 senators) to pass the Senate. Even less sweeping legislation would still require a minimum 60 votes to overcome the filibuster. That said, investors would be wise to still expect at least some regulatory changes, albeit relatively minor ones. For example, some changes might include somewhat higher marginal income tax rates at the upper end which may, in part, be partially offset by the reinstatement of certain itemized deductions (e.g., the deductibility of state and local income taxes). However, given the make-up of the new Congress, major changes to estate, dividend, and capital gains taxes are likely off the table.
There are also areas where both parties are likely to agree. With interest rates at historic lows and the nation struggling to combat the economic impact of COVID-19, there’s bipartisan support for a large infrastructure package that would also likely include increased spending on education (Democrats have argued any definition of infrastructure should include human capital, not just physical capital). Such new spending will provide yet another powerful tailwind for financial markets, especially stocks, but will also add to the nation’s ballooning federal debt. Finally, neither party is happy with the current state of “Big Tech,” especially social media companies such as Twitter and Face Book. The prospect of new anti-trust legislation, the repeal of specific legal protections (e.g., Section 230), or increased regulatory oversight all seem quite likely.
Investment implications
Over the past nine decades, the United States has faced contested elections, impeachments, wars, economic and geopolitical crises, and even terrorist attacks. Our system of government, regardless of party control, has managed to work through these and other challenges to our democracy and economic well-being. And through it all, the S&P 500 delivered a compound annual return of 9.9% to investors. Overall, markets were positive in 73% of all calendar years since 1928. The only reliable conclusion one can draw from market history is that, despite which party controls the White House or Congress, markets continue to be reliable venues for building wealth over time.
Exhibit A: Markets rise over time, regardless of party control of the White House.
Exhibit B: Markets rise over time, regardless of party control of Congress.
The road ahead
None of this is to say that markets won’t be volatile over the next few years; of course they will, just as they have under prior administrations and Congresses. The great thing is that there are time-tested risk management strategies for reducing the impact of market volatility and regulatory changes on your portfolio. The first, and most obvious, is portfolio diversification. The real lesson of 2020 for investors is that diversification worked when it was needed most, first during March’s brutal bear market sell-off and again in the fourth quarter’s venomous election when market leadership rapidly rotated out of technology stocks and into small cap, value, and emerging market stocks—all of which were previously unloved asset classes.
The second and perhaps less obvious strategy for managing regulatory risks is proactive wealth management, especially with respect to taxes and estate planning. Working with a trusted advisor, one with a deep bench of highly trained in-house tax attorneys, CPAs, and other experts, can make all the difference in the world when it comes to protecting you and your family from changes to tax or estate laws. Proactive, ongoing planning isn’t just achieving goals—it’s also about managing those risks that present a very real threat to those goals, whether those risks be market, tax, or legal in nature.
Exhibit C: Market leadership rotated in during the fourth quarter.1
1 Source: FactSet, Inc. Q4 2020 returns for SSGA Technology Select SPDR (XLR), Russell 1000 Value Index, Russell 2000 Index, Russell 2000 Value Index, and MSCI Emerging Market Index.
Notice 2024-35: Relief With Respect to Certain RMDs
The Hidden Hazards of Inheriting an IRA: Why Beneficiaries may Face More Harm than Good
Financial Planning for Caregivers of Aging Family Members
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.