Election Results & The Impact on the Markets in 2021
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Zach – Hey everyone, Zach Holcomb here, back with this week’s blog. As always, we have Michael Reese, Certified Financial Planner and president of Centennial Advisors here alongside me, Mike, today, we’re gonna be talking about the election results. I know everybody is not tired yet of talking about election. It’s still ongoing I mean, I think it’s gonna be well into next year this will still be a very hot topic of discussion. But more specifically, we’re gonna talk about how this election has an impact on the market and taxes, right?
Michael – Yeah, I think that’s the goal this week, as you said, the election oh my gosh It’s I’ve got election what do you call it? Just exhausted from election exhaustion maybe. I just don’t wanna hear about it anymore basically, but it looks as though from everything I’m seeing that Biden’s gonna win this thing, I don’t think Trump is going to be able to prevent that. It looks like the house is still gonna be in democratic control and it looks like depending on what happens in Georgia…. that the Senate will stay in Republican control. So that’s what it looks like at least as we’re recording this today, right?
Zach – Right, so lemme ask you this, given that structure that you just kind of laid out what can we really start to expect for the market and taxes over the next few years as we have this shift in our world?
Michael – Yeah, so that’s a great question. First of all, what we expect the outcomes to look like, I guess we could say it that way. It appears that what we’re going to have is we’re going to have the Democrats in charge of the presidency and the house, and then the Republicans in charge of the Senate. So, basically when you have a mixed bag like that, what you end up getting a lot of times out of Washington, DC is, well, quite frankly, nothing significant a whole lot of nothing. Just everybody talking, but not a lot of stuff happening. That’s actually really good for markets though markets love that, the stock market loves certainty and it hates uncertainty. When you have one side of the aisle in charge of all three levels there, the presidency, the house and the Senate, then the markets don’t know what to expect because suddenly a lot of significant action can be taken by the politicians in DC. Generally speaking, markets are not fans of this. That’s very, leads to a lot of uncertainty as to what they’re gonna do. But when you have, this mixed bag as you will, markets the way they look at it, they’re like, ah, this is great. Nothing significant is gonna happen we can make plans and move forward. So, I think for the markets, they’re going to appreciate a mixed bag if you will. And then even from the tax side of things, we are currently living in the lowest tax rate environment in history, it could be argued. And with this mixed bag, Zach, I’m not real sure… I don’t think we’re gonna see a lot of change, at least knock on wood, right? Knock on wood, hopefully the Republicans in the Senate can block any significant change there, but we’ll see, you never know what’s gonna happen, but that’s kind of what we’re looking at right now I think.
Zach – Right, so talking a little bit more specifically about the markets themselves. In 2020, you said, or 2021, “we don’t expect a lot of major changes going forward.” But looking at this year, do you expect things to be similar going into next year or what do we expect going forward?
Michael – Well, with the markets, you mean?
Zach – Yeah, with the markets.
Michael – Yeah, that’s a great question you know, this year, as we all know, 2020 was just insane. It started out moving upwards and we were all talking about back at the beginning of the year, how markets are wildly overvalued. And then bam along comes the Corona virus and markets lose, 30% in a month, I mean, just this huge, huge drop very quickly, people are freaking out a bit at that point. But then we had this V-shaped recovery for no apparent reason, right? There’s no legitimate economic, anything that would support a V-shaped recovery yet we had it anyway somehow. And so that happened and as we’re coming into the end of the year, it looks like markets are going to end up on a positive note. That’s great, I guess for the person that just rode that crazy wave. If we started the year fully expecting the markets are wildly overvalued, and we go through this year and we end the year and the markets are higher, and the economy is worse than when the year started. What does that mean for market valuations? Well, this is a great example of how emotions drive markets not logic. So, in the long run, fundamentals drive market pricing, but in the short run it’s emotions. And I mean, look at Tesla is just being added to the S&P 500.
Zach – Yep.
Michael – Their market valuations are not supported by anything that is other than wild emotion, right? It’s like, why is Tesla valued so high? You cannot make any argument that they deserve the valuations that they have, but they do and that’s emotions. So, how long will that continue? I don’t know. Here’s what I can tell you though. The Fed is keeping interest rates low, and they expect to continue that they’re not worried about inflation. And as long as the Fed’s keeping interest rates low, we have what we call a Tina situation. Do you know what Tina stands for?
Zach – Enlighten me on Tina.
Michael – There is no alternative. That’s what it stands for. In other words, if you want income, can you go to the government and get government bonds paying any kind of income? No, they’re paying less than 1%. CDs are paying nothing, banks are paying nothing. Where can you put your money and get any kind of return these days? You gotta put it in the market, there’s no another option. So, the market’s being supported by the Fed, and as long as that continues, guess what? That plus emotions means that markets are probably gonna continue their upward climb especially, as COVID here we’re seeing that a number of these big drug companies are starting to report that they have some vaccines that are 95% plus effective. So, I actually think it doesn’t matter who the president is, I think 2021 may actually end up being a pretty good year from the momentum of coming out of the Coronavirus.
Zach – I love hearing that, you know, we always wanna be as optimistic as we can. Let’s shift here, we talked about the market let’s talk a little bit about taxes going forward. If you’re someone who is retiring soon or maybe you’ve just recently retired, you just talked about taxes are arguably the lowest rate they’ve ever been. What does a retiree need to be doing taxwise right now, or like going forward?
Michael – Yeah, see, this is really the big thing. One of the a… A lot of people as you know Zach were very worried about, Hey, what if Biden gets elected? How’s that going to affect taxes?
Zach – Right.
Michael – And, Biden has been… He has been very, very clear. By the way, talk about two different perspectives, right? Here you have current president Trump, who clearly distrusts Washington, D.C. He obviously very clearly he does not trust D.C and politicians. And he’s a big believer that any dollar that you send to Washington, D.C is a wasted dollar, and it’s obvious. He’s obviously believes that dollars in your pocket… You should keep money in your pocket because it’s better utilized in your pocket, not in D.C. Now along comes Joe Biden, who obviously feels the opposite. He’s like he’s very comfortable, the old tax and spend out there, He’s very comfortable say no, Washington, D.C spends your money wisely. You should send your money to Washington, D.C so that we can spend it for you, so, that’s his perspective. And Oh boy, Kamala Harris is his VP, she’s even further down that path and she’s almost socialist. So, you have very different perspectives here so, the big concern is, Oh, no, if Biden gets elected, how’s that going to affect tax rates? We have this current tax rate that Trump was able to push through, they’re the lowest tax rates in history, Biden’s been very open in saying, “Hey, I wanna get rid of that thing, I wanna reverse, I wanna go back to the way it was.” And he always wants to say it’s for the rich, right? I’m using… If you’re listening to the podcast, I’m using my air quotes here.
Zach – Air quotes right.
Michael – We’re only gonna tax the rich. And I’ve learned over my many years that when a politician says, “we’re only going to tax the rich.” What they’re really saying is, “We’re gonna tax everybody, but we don’t want you, We’re not gonna say that. Because we can’t get our agenda through if we’re honest, we have to say, no, we’re only gonna tax rich people.” Anyway, the point I’m trying to get to is that as we look forward from the election outcome, with Biden being elected we think, but with this mixed control, as long as the Senate can hold firm, nothing’s gonna change in the tax code. The tax code is gonna be exactly the way it is, it’s currently projected to stay the way it is, until the end of 2025, and then it’s done. And then we go back to the old code or something else. Reality is this, as long as the Republicans hold firm in the Senate, assuming that they maintain control, depending on what happens in Georgia, then we’re good for the next few years. But I gotta tell you something if you go to usdebtclock.org, a great website to go to, it gives you a picture of the financial health of the federal government, it’s really a mess I mean the thought of,
Zach – A lot of red.
Michael – Yeah, the… Let’s be honest, politicians are horrible at being fiscally responsible, I mean, we all know that. And they have built up this enormous debt in D.C. that’s gotta be paid off at some point. And who knows? They may start printing money just inflate the dollar, to pay off a big chunk of it. But the other way to pay it off, is it getting to increased taxes at some point. It’s almost… It’s not really a question of, are they going to increase taxes? It’s a question of when? And when at this point might be 2026. We could very well, Zach be in the next few years, it might be the… I think it’s very likely, that these are gonna be the lowest tax rates that we’ll see for the rest of our lives. And if that’s the case, you got take advantage of it, right?
Zach – Absolutely, now’s the time when we have this window, why not take advantage of it?
Michael – Yeah, so for a lot of people, you always ask the question, what should people do? I mean, here’s the thing. For our clients they know, we sit down with you. I mean, we’re recording this in middle November, we’ve been sitting down with clients doing tax planning, at year-end tax planning they sat down with us, they sat down with our CPA. But the point is, if you’re not a client, you should be sitting down with someone every year. This is not a let’s do a one-time and we’re done kind of thing. Every year, you should be sitting down with a tax planner, and whether that’s your CPA or your financial advisor, and really evaluating, where are you today from a tax position? What tax brackets are you in today? What tax brackets will you likely be in down the road when you’re retired? What will the tax situation look like if you’re married and you die and what for your surviving spouse what might that look like? And what do we learn from those questions? We get some answers to those questions what do we learn? In a lot of cases, Zach, what we’re learning is, holy cow, I’m in, when I retire or a lot of people say this, they say, “Gosh, when I retire, I’m gonna be in the same tax bracket maybe higher than I am today. And holy cow, if I die, my surviving spouse, they’re gonna be in single tax brackets versus married. Their tax rates are going to be even way worse, way worse.” And so the question is, what can we be doing today, to alleviate that pain later? And in a lot of cases what that means is, we should be taking every one of you, you should be looking at your tax brackets and say, “Hey, can you take advantage of these low tax rates that we have today? Why not pay a little bit more tax today, in order to save a ton of tax later on.” For a lot of people, this is a no brainer opportunity. And really the unfortunate thing, Zach is, a lot of people, common question we get, how much should I do each year in a Roth conversion? For our clients, they ask that question, we answer it. But for a lot of people out there unfortunately, they’re not getting that answer because they’re not working with someone who can supply that answer.
Zach – Right, and you just said, you hear it all the time, I hear it as well. When I have this conversation with families and individuals that are like tax planning, I didn’t know we talked about that with the financial advisors, they’re completely in the dark.
Michael – Yeah, and how many people have a CPA that actually that really and truly proactively sits down with them to look at these types of questions? Where are we today? I mean, CPAs are trained in the here and the now. Very few CPAs are trained to look into the future, they look at the here and the now. And they’re trained to keep your taxes low today, in the here and the now. The problem with that is, actions have consequences, and you have to start thinking to yourself, great, I’m saving tax today. When tax rates are the lowest, they aren’t likely gonna be for the rest of your life. But is that creating some serious tax problems later on after tax rates are likely to rise or taxes are likely to get worse? Wouldn’t it make sense to take a step back and say, “Well, wait a minute, why don’t we today run some kind of projection and say, well, gosh, what might those taxes look like in the future? And where am I likely going to be in the future from a tax perspective? And do I like that answer? Right, do I like where I’m going here? Or, and am I really making smart choices today?” I mean, the choices you make today they affect your taxes today, but they also affect your taxes down the road. And, are you making choices today, that are great for today, but terrible for later on.
Zach – Right.
Michael – That might not be something you want to do, is it?
Zach – No, not at all. And Mike, something we often say is, you may argue to be positioned very well tax-wise, but does it ever hurt to get a second set of eyes on things just to get that reassurance so you can sleep well at night knowing that you’re planning as effectively as you can for the future?
Michael – That’s, you know what, that’s great, great point. I was talking to a gentleman the other day, and, I was talking to him and he was asking about tax planning. And this gentleman, I really have to Pat them on the back. I told them you’re doing a great job because he was, doing it every… Ever since this tax code came into play, he’s been maxing out the 24% tax bracket, which you can have up to for married family, $351,000, of adjusted gross income this year, and still be in that 24% bracket.
Zach – Wow.
Michael – So, he was taken advantage of that, ever since this came out back in 2018. So he’s already three… This is the third year he’s into it, but he just wanted me to look over his shoulder and say, “Hey, double check my math here, make sure, I wanna just double check that I’m doing the right thing” and he was. Because what he had done Zach is he had calculated, that in the future, if 25% would be the lowest tax that he would pay, and it probably would pump up to 28, maybe higher. And his comment is like, “Why would I not take advantage of lower rates today? When my accounts are smaller? Because later on, the rates are gonna go up and my accounts are going to be larger. Do I wanna pay a lower tax rate on a smaller pot of money? Or do I want to pay a higher tax rate on a bigger pot of money?” It’s like, duh, so to him it made perfect sense. And so then he was very comfortable doing his own taxes, he just wanted me to look over his shoulder and I did, and he was in great shape, so that was a great conversation for him. It was a good double-check to make sure he was doing the right things. Now, what he was not considering though, because as we say, Taxes are different for everyone, right Zach?
Zach – Absolutely.
Michael – What he was not considering was that when he turns 65, he’ll be a Medicare and your income two years prior to that when you’re 63, will impact the premiums you pay for your Medicare for your part B. Now this gentleman, he was 61, so he had a couple of years before this would come up, but he didn’t know that, right? So he found value out of talking to us just because that was a factor that… By the way, it’s the factor that would not slow him down on doing his conversions ’cause he should do them anyway. But it’s like an additional tax that you pay, and you need to be aware of that because every little… You got to calculate all this stuff, ’cause you wanna make sure you’re really on top of it and that you’re doing the right things.
Zach – Right, And like you said, “Everybody’s situation is different.” This guy, for example, for the most part was doing a pretty good job, but because he had that conversation with us, we were able to add a little bit of value to his planning. And that’s really something that you can take advantage of when you have a conversation with Mike and our team.
Michael – Yeah, that’s exactly… It’s funny he said exactly that he’s like, “Man, I’m so glad I had this call.” He goes, “I feel good that I’ve got a Certified Financial Planner tell me I’m doing it right. I never knew that, if I had not known that, I can’t tell you how irritated I would have been when I started to have to pay higher Medicare premiums. But knowing in advance, it’s like, now I can include it in my calculations and I feel like I can make smarter decisions.” He goes, “That was fantastic, just that was worth the call all by itself.” He said, And I understand that. I mean, it’s for people that do it themselves, Hey, why not have someone double check your math or double check your work? And more importantly, for those of you that don’t do it yourselves, right? Where you say, “Hey, I don’t want to mess with this I’m really, really smart at what I do, but I don’t wanna mess with that. That’s just the taxes yuck, it makes my head hurt.” Then, goodness gracious, why not schedule a time to talk to us or something, so that you can get some good answers for yourself, right?
Zach – Right, absolutely. And just to wrap up thoughts from myself today, like Mike said, It never hurts to get a second set of eyes on things because, you could be positioned in fantastically, but it’s always great to get some reassurance on your plan because there’s nothing more than living the retirement of your dreams. Right, Mike?
Michael – Yeah, and I would also comment that here’s the other thing. What if, when we talk, we find out something that’s really important that you missed? That happens all the time.
Zach – It does.
Michael – And so, what if you miss something? Especially the tax code, the tax code is filled with the saying, “You don’t know what you don’t know.” So, what if you miss something? Having a second set of eyes can really be incredibly valuable. So, here’s how I wrap up today, I guess what I just wanna say Zach is, that is, you know, The election is hopefully over, pretty close to over, gosh, just exhausted by it. But it’s pretty much done. We pretty much know what to expect, and that’s gonna certainly have an impact on markets will have an impact on taxes, hopefully positive in both fronts but you never know. And either way, I mean the bottom line is this. You work your whole life. You save money your whole life and you do it so that you can enjoy the retirement of your dreams. Let’s make smart financial choices together, so that you can truly enjoy the retirement that you deserve. And Zach, if anyone out there, if they want to talk to us, what’s the number they should call to get something on the calendar?
Zach – Give us a call, our number here at the office is gonna be 512-265-5000. You can also go to our website, that’s CEN advisors, iwanttoretirewell.com. And you can book a time right on our calendar there.
Michael – Oh, I didn’t even know we could do that, fantastic. This is all these smart tech people, right? Alright, so- Well, listen, I think this is good for today, why don’t we wrap up Zach? Enjoyed our talk today, and for all of you listening, remember your best is yet to come. Let’s make sure that you have… You make retirement the best time of your life.
Zach – Thanks everybody, we’ll see you next week. Bye.