Investor reviewing the economic and political news

August 14, 2020

U.S. Economic, Political and Health Uncertainties: In Review

City National Bank's investment leaders now consider it somewhat likely that the Democratic Party will sweep the November elections. They suggest that clients talk with their portfolio and tax advisors about moves that might make financial sense in advance of potential policy changes.

The U.S. stock market already anticipates victory for Democratic presidential candidate Joe Biden but hasn't fully accounted for the possibility that his party will hold both houses of Congress and enact significant tax changes, according to Tom Galvin, chief investment officer for City National Rochdale, the bank's investment advisory organization.

“We now believe the probability of a Democratic sweep is somewhat greater than 50 percent," Galvin said, noting that the team previously expected no single party to control the White House and both congressional chambers after the upcoming elections.

The analysts based the new forecast on recent polling, consumer attitudes showing openness to change and the historical tendency for incumbent presidents to be voted out when the economy is doing poorly. Keep reading for your weekly market update.

Preparing for A New Political Landscape

While Biden's tax plans — notably his proposal to raise the corporate income tax rate to 28 percent from 21 percent— could shave a few points off the S&P 500, it's too early for investors to adjust their portfolios just yet, Galvin said.

And while the presumptive Democratic nominee proposes raising the capital gains tax to 39.6 percent, from the current 20 percent for those earning at least $1 million annually, Galvin advised against selling stocks on that possibility alone, as he said there's little correlation between the stock market and capital gains taxes.

But Rochdale leaders, outlining several potential tax changes, discussed moves that investors might consider with their advisors to protect their assets and optimize estate planning under current regulations.

"Timing is everything. If you wait to do something or look into something, it may be too late," said Jeffay Chang, a City National Bank trust advisor, recalling the "mad dash" to shift portfolio holdings in anticipation of tax changes after the 2012 elections.

Galvin cited a Gallup poll showing that 86 percent of Americans are dissatisfied with the way things are going in the country, approaching the peak seen in the 2008 financial crisis and a very rapid change from February, just before the coronavirus forced widespread business shutdowns and unemployment in the United States.

"People in the U.S. today are not happy," he said, and when the people are not happy, "the political landscape can change."

Dissatisfaction is new historic highs

Anticipating A Change in Policy

So what policy changes might a Democratic government make that could affect investors' portfolios and wealth planning?

Chang noted that Biden's numerous tax proposals include:

  • a higher personal income tax rate for those in the top bracket.

  • removing the limit on deductions for state and local taxes and real estate while capping overall deductions at 28 percent.

  • reinstating the Pease limitation on certain itemized deductions (repealed in 2017), which capped deductions for high-income taxpayers.

  • lowering exemption thresholds for estate and gift taxes, which could lead to the $11.58 million lifetime gift tax exemption being cut by more than half.

  • eliminating the step-up that allowed heirs to avoid capital gains by inheriting stocks with the basis at current valuation upon a benefactor's death.

“Whether any of these will be implemented will depend on what happens in November," he said.

Personal Income Tax Plan Comparison
Personal Wealth and Estate Tax Plans

What this means for investors

Chang said investors might want to consider some moves in preparation for these potential changes, such as making gifts to children now, accelerating charitable donations to take advantage of current deduction allowances, converting an ordinary investment retirement account to a Roth IRA or accelerating ordinary income in anticipation of higher tax rates, among other possible strategies.

Portfolio manager Rachael Crane noted that City National Rochdale is using new technology to help clients achieve their goals, employing various different "levers" — including risk tolerance, liquidity, tax sensitivity and personal constraints — to optimize portfolios.

She cited a scenario involving a hypothetical client whose priorities include retirement, travel, his daughter's wedding and leaving an inheritance, and how shifting different levers using "intelligent personalization" could help him achieve his goals.

Levers for Intelligent Personalization

More developments

More broadly, the bank's investment team noted ongoing challenges with the coronavirus pandemic as well as some promising health and economic developments, including slow declines nationally in cases and hospitalizations, encouraging but slowing hiring trends, growing likelihood of a vaccine by the first half of 2021, and improvements in U.S. manufacturing — notably in auto production.

Auto production appears to have recovered rapidly

Hiring continues but the pace is slowing, Galvin noted, citing data from Bloomberg and Blue Chip Economic Indicators.

The biggest gains have come in some of the industries hit hardest by the pandemic, including construction, manufacturing, retail, leisure and hospitality, and education and health services, he said, citing Bureau of Labor Statistics data.

Biggest gains in a few industries

While political disagreements have stalled passage of another government economic stimulus package, City National's investment leaders continue to expect passage of an additional $1.5 trillion in fiscal support to help U.S. businesses and consumers stay afloat during the coming months of pandemic disruption.

On Consumer Sentiment and Economic Recovery

The team expects the U.S. and global economies overall to maintain their recovery with the help of their governments' support, and they anticipate that S&P 500 earnings will rebound next year, despite significant permanent disruption to many big and small businesses.

Galvin noted that the S&P 500 is near an all-time high, and a market correction could occur if consumer confidence in government stimulus support, the economic rebound or coronavirus containment erodes.

Ben Goetsch - Rochdale senior analyst, investment solutions - cited data from The COVID Tracking Project and said most of the nation is progressing toward reopening targets, based on changes in hospitalizations over the past two weeks and positive coronavirus test rates. Fatalities have increased but at a slower rate in the past week or two and at levels below the April and May outbreak, possibly because of treatment improvements, he said.

Most of the U.S. is making progress towards reopening targets

However, case levels remain "elevated from where we'd like to see them," Goetsch said.

The current debate on school reopenings indicates a lack of consumer confidence in the pandemic outlook from a health standpoint, he said, suggesting that improving case load and hospitalization trends in the next few weeks may affect sentiment positively.

“We're at levels of spread and outbreak that are too high to make people confident enough to get back to normal life," said Goetsch.

The Rochdale team, in positioning client portfolios, continues to emphasize high-dividend stocks and high-yield bonds in an environment with low investment-grade bond yields and full equity valuations.

In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals today to ask questions and receive help with your wealth planning needs.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. 

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City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the August 12, 2020 presentation, “Muddling through economic, political and health uncertainty," is reprinted by permission from City National Rochdale.

City National (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this article and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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