How the 2016 Presidential Election Could Affect Your Investments

Here's what could be in store for your portfolio after the next election.

Matthew Frankel, CFP
Matthew Frankel, CFP, Selena Maranjian, Cheryl Swanson, Brian Stoffel, and Dan Caplinger
Nov 15, 2015 at 7:07AM
Investment Planning

Source: Flickr user DonkeyHotey.

The outcome of the 2016 presidential election could affect your daily lives in many ways, and your investments are certainly one of them. Not only will the outcome have an impact on specific stocks and sectors, but certain changes to programs such as Social Security can affect your overall strategy. With that in mind, our contributors would like to share five ways the next president could affect your investments.

Cheryl Swanson: It wouldn't surprise me to see a lot of turbulence in the healthcare sector as the election approaches, especially since so many Republican presidential candidates have made the abolition of Obamacare a key political goal. From the other side of the aisle, the iShares NASDAQ Biotechnology ETF took a visible leg down in September, when Democratic front-runner Hilary Clinton targeted price-gouging in the specialty-drug market.

Clinton has made no secret of her war against high drug prices. Her recently released "affordable healthcare drug" platform supports legalizing prescription-drug imports from Canada. She's also promoted requiring biotechs and pharmaceutical companies to invest in the research and development of generics.

On the other hand, a Republican win would probably spur efforts to repeal or radically alter Obamacare, not great news for health insurers that have enjoyed big earnings increases as the number of insured ramps up. Still, I'm not anticipating making any major changes in my portfolio. While campaign promises may be instrumental in getting an official elected to office, as we all know, they often remain just that after the election. Promises.

Dan Caplinger: Income tax reform has been a hot-button issue among presidential candidates, with implications both for the businesses in which you invest and for your own personal tax liability on your investments. Corporate tax reform has come to the forefront because of the large number of tax-inversion transactions in recent years that have led to U.S. companies moving their headquarters to lower-tax jurisdictions in order to reduce their total tax liability. Some candidates want to reduce the tax on repatriating income to the U.S. in order to spur domestic investment, while others prefer stronger regulation that would essentially tax worldwide income regardless of whether companies ever choose to bring that money back to the U.S. market.

Meanwhile, on the individual income tax front, candidates have a wide array of proposals. Some advocate a flat tax, while others would retain multiple brackets but with fewer than exist currently. Some candidates would eliminate favorable tax rates on capital gains and dividends, while others would make them even lower or even get rid of taxes on certain types of investment income entirely.

With Republicans controlling Congress, a Republican president in 2016 would face an easier time of implementing tax reform than a Democratic president would. Nevertheless, investors need to watch closely to understand what each candidate would seek to do with their taxes.

Matt Frankel: An investment-planning issue that could be affected by the upcoming presidential election is estate taxes, and the measures investors take to get around them.

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As of 2015, the first $5.43 million of an estate is exempt from taxation, but any excess is subject to estate taxes. The estate tax can be expensive, with a top rate of 40%. So wealthier individuals generally take measures to avoid estate taxes.

For example, there is a $14,000 annual gift exclusion, meaning that they can give away that amount per person each year that won't count toward the $5.43 million exemption. Or assets can be "removed" from estates by placing them in a trust.

The democratic candidates generally favor increasing the estate tax. Hillary Clinton hasn't proposed anything specific, but Bernie Sanders has proposed lowering the exemption amount to $3.5 million and increasing the top tax rate to 65%. So if the Democrats win, estate planning will become much more important for many families.

On the other hand, most of the Republican candidates want to get rid of the estate tax altogether. The basic argument is that this money was already taxed once when it was earned, so why tax it again? Many people dislike transferring assets into trusts, and the elimination of the estate tax could make it less compelling to do so.

Selena Maranjian: One way the 2016 election could affect your investments is Social Security. With fewer workers per retiree than there used to be, the system is headed toward insolvency in the 2030s, at which point benefits may be reduced (but won't be eliminated). What do the candidates suggest doing about that, and about Social Security in general? Well, lots of things.

Many GOP candidates, such as Jeb Bush, have advocated privatizing Social Security. This would remove the guaranteed income from the government (to which workers earn entitlement by paying into the system) and replace it with private investment accounts. Such accounts might deliver more income in retirement, but most Americans are not savvy investors and the stock market doesn't always move higher, so many retirees may end up with less income. Chris Christie and many others have proposed raising the normal retirement age from its current 67 (which is already up from the 65 of yore) to 69. That would mean a lot more working for many Americans, some of whom will be in poor health by then, and a shorter retirement to enjoy, too.

Bernie Sanders has proposed strengthening Social Security by removing the income cap above which earnings aren't taxed for Social Security and by increasing benefits to retirees as well. Hillary Clinton is less ambitious, opposing privatization and supporting increased benefits for the poorest retirees.

One way to protect yourself from the chance of reduced Social Security income is to build alternative income streams for yourself, through stock appreciation, dividends, bond interest, annuity income, or whatever makes the most sense for you. A silver lining in working longer is that you can sock away more for retirement while delaying when you begin to tap your nest egg.

Brian Stoffel: The more time I spend writing for the Fool, the more I realize that the interplay between politicians and the stock market isn't as one-way as many would like to believe. Indeed, I think the president, whoever he or she may be come 2017, will have far less control over the economy, and your investments, than you think.

Fellow Fool Morgan Housel did some research on the topic back in 2012. Looking simply at stock market returns, here's the list for how each president since 1900 has stacked up.

Source: Robert Shiller and Morgan Housel's calculations.

It's tough to find much of a definitive conclusion from this list. The difference in average returns between Republican and Democratic presidents is less than one percentage point of returns per year -- and that's from a very small sample size.

As Morgan stated in his piece: "Presidents get too much credit for the economy when things are good, and too much blame when things are poor. ... In reality, Congress and the Federal Reserve probably have just as much, if not more, sway over the economy [as] any president."