Dear Clients,
The gambling known as business looks with austere disfavor upon the business known as gambling.
Yours truly isn’t a fan of gambling, though I’ll confess to rolling the dice on a Powerball ticket now and then. After all, one can’t win the lottery if one doesn’t “play” the lottery. As a professional investor, I acknowledge a small degree of irony in my aversion to casinos, despite the obvious appeal of free beverages and an all-you-can-eat buffet. Indeed, many commentators have likened the stock market to the grandest gambling den, albeit one in which the odds of winning may actually be tilted in your favor. [1] This contrasts sharply with those establishments in which every betting game is designed to give the casino a mathematical advantage – thus begetting the phrase, “the house always wins.”
As you may have heard by now, betting on a much different House is now legal, as last week a US appeals court gave financial exchange Kalshi permission to let Americans bet on which party will control Congress. Federal regulators had tried to block the political betting market, arguing such activity could subject elections to manipulation by high-stakes gamblers. The appeals court saw no valid reason to block such wagers, allowing bettors to put their money where their political opinions lie. [2]
Should investors worry about the election’s outcomes? Yes - and no. At the broadest level, the important thing is to remain invested for the long term and not let emotional or political views impact your portfolio decisions. We’ve seen several reports demonstrating that the US stock market tends to do better under a Democratic president than a Republican one, but those reports rarely give a complete picture (nor context for the chosen time periods analyzed.) As a recent Charles Schwab & Co. piece highlighted, in the post-World War II period, an investor who put $10,000 in a US large-cap stock index in 1948 but stayed invested only during Republican administrations would have had nearly $312,000 at the end of 2023, while they would have had over $1.2 million if they had invested only during Democratic presidencies. The report goes on to show that, if the same investor had ignored politics and stayed invested the entire time, their investment would have grown to almost $38 million! [3]
That said, the upcoming election may have a significant impact on tax policies for the years ahead. The two presidential candidates have very different tax policy agendas, encompassing individual income tax rates, corporate tax rates, capital gains tax rates and potential taxes on unrealized capital gains, and estate taxes and the possible sunsetting of the Tax Cuts and Jobs Act (TCJA) at the end of 2025. As Schwab correctly notes in a separate report on the election and taxes, “A promise to reduce taxes has been a feature of most presidential campaigns for decades. But taxes can only be adjusted by Congress. That means the proposals made by candidates represent the starting point for debate, nothing more. There is broad expectation that 2025 will see the most significant debate over tax policy in nearly a decade. But it's far too early to know exactly how that will play out and it is a virtual certainty that anything Congress does end up approving next year will look very different from the proposals that are out now. Investors should be cautious about making any decisions now based on possible changes to tax law in the future.” [4]
*****
Despite an uptick in pre-election volatility, the stock market remained strong in the third quarter of 2024, as economic activity remained relatively robust, and several measures of inflation trended lower. Betting on the bond market has become a more challenging game for many investors, as sentiment quickly shifted from “higher rates for longer” to “lower rates, sooner” and back to somewhere in-between those extremes. At Evermay, we were fortunate to have been positioned in the short-end of the yield curve during the Fed’s rate-hiking cycle. Now that the Fed has reduced its target for the Federal Funds rate and suggested more rate cuts are on the horizon, we expect the yield curve to begin to normalize, or at least become less inverted than it has been. In this environment, we may be making additional changes to our fixed income holdings, possibly incorporating new investment approaches in our client portfolios.
While Evermay does not provide tax advice, we are always happy to review your personal financial situation and the impact that the election and resultant tax policy changes may have on you and your family. As always, we encourage you to reach out at any time to discuss your portfolio to ensure your mix of assets is appropriate and aligned with your financial goals.
Warmly yours,
Mitch Schlesinger
Chief Investment Strategist
[1] Burton Malkiel, A Random Walk Down Wall Street, 1973. “Historically, the stock market is like a gambling casino with the odds in your favor. Over the long pull, stocks are given something like nine and a half to ten percent compounded per year. The banks have probably given you something in the order of four to five.”
[2] Politco.com, Political bettors hit the jackpot as court clears election markets for comeback, 10/2/2024
[3] Charles Schwab & Co., Party in the USA – Election Facts, 10/1/2024
[4] Charles Schwab & Co., 2024 Election: A Look at Candidates' Tax Proposals, 9/262024
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