JPMorgan Wealth Management recently hosted a webcast on the potential investment impacts for you and your business through the 2024 election cycle and into the end of the year. The event was hosted by Rob Ferrari, head of solutions and advice, and featured a conversation with Elyse Ausenbaugh, head of investment strategy, and Adam Frank, head of wealth planning and advice.
With so much still up in the air and dependent on the outcome of the democratic process, it’s natural to be concerned about how this will affect your finances. Here are some key takeaways.
First, Ozenbau noted that investors have enjoyed strong returns over the past year, with stocks up about 30% and core bonds posting high single-digit gains, which are likely to translate into solid gains for well-diversified portfolios.
Buoyed by subdued inflation and solid economic growth, markets have continued to rally over the summer, but the gains have been volatile, leaving some investors wondering what’s next.
Signs of a weakening labor market are at the center of new questions about the sustainability of the economy. Ozenbau noted that the recent rise in unemployment is being driven by a growing workforce and a slowing pace of hiring, not layoffs. Ozenbau said there is little evidence that companies are preparing for large-scale layoffs, given the robust growth in corporate earnings and the recovery in corporate profit margins.
“The combination of a slowdown in the labor market and signs that the rest of the economy, businesses and consumers are actually doing well — taken together, these trends are causing investors to reevaluate how they rebalance their portfolio exposures,” Ozenbau explained.
In addition to the changing election situation, the Fed is also in a transitional period regarding interest rate policy. Fed officials have kept the benchmark interest rate at a conservative 5.5% since July 2023, but they have made it clear that the time has come to adjust policy and that they would not welcome further weakening of the labor market.
Much of the debate has centered on whether inflation can return to acceptable levels without a recession — in other words, whether a “soft landing” is possible.
“Based on the data that we have, I would say that the wheels are already on the ground and the landing so far looks pretty smooth,” Ozenbau said.
As long as inflation continues to move in line with expectations, the Fed’s willingness to cut rates and ward off weakness should bode well for businesses and households, Ozenbau said.
“We encourage investors to strike a careful balance between managing risk and seizing opportunities,” Ozenbau said.
Cash tends to underperform during interest rate cutting cycles, so it may be a good time to reassess your cash position. If you decide to reallocate some of your cash holdings, high-quality short-term bonds can help you lock in your current yield for longer. Alternatively, you can choose longer-term bonds to extend even further. Municipal bonds can also be a good choice for individual portfolios, as they not only lock in your yield, but also have tax advantages and defensive characteristics that help offset volatility.
Also, with trend-in line mid-to-high single-digit returns expected going forward, this may be a good time to consider building or adding exposure to equities.
Additionally, Frank said investors should keep in mind that a declining interest rate environment is just around the corner, so interest rates today are higher than they will be six months from now. For now, strategies to take advantage of temporarily higher interest rates may be worthwhile, “such as a charitable remainder trust,” Frank said.
When it comes to the US political landscape, not only occupancy of the White House is up in the air, but the balance of power between Congress and the president will also affect what policy proposals are likely to be enacted.
While we don’t have a crystal ball to predict exactly which direction policy will take, given the state of things being proposed, potential tax changes are probably top of mind for investors right now.
“The outcome of the election could also affect capital gains tax rates,” Frank said, “but that would require legislation from Congress.”
Before we know what’s being discussed about tax policy, what investors can do today is to gain some control and optimize their financial situation to weather potential changes. That might mean using tax-loss-capture strategies, investing in municipal bonds instead of fully taxed corporate bonds, or talking with an advisor about what types of assets should be held in certain types of accounts to optimize tax treatment.
The expiration of the 2017 tax law will also have a significant impact on the gift tax exemption. Without legislative action, the lifetime exemption amount that can be passed on without incurring gift tax will also revert to its previous level, meaning that at the start of 2026, the limit will be cut by almost half.
If you’re worried about the impact gift and estate taxes will have on the assets you’re leaving to your family, you might want to take advantage of the more generous exemptions before they are reduced, though Frank suggests that the best strategy for this will depend on the type of assets you own and your family situation, and it’s a good topic to discuss with your financial advisor.
Frank looked at changing rules on intergenerational wealth transfer that could impact business owners and focused on the importance of business succession planning. In this regard, having a plan is key. “The earlier you start thinking about what your plan is, what you want to do, the more flexibility you have and the higher the odds of having a successful succession plan or transition plan,” Frank said. Determining the best way to exit a business, whether by passing control to family members or selling the company to employees or a third party, requires a long-term plan, regardless of the latest political or tax developments.
For Frank, another key element of successful business succession is communication, which means actively engaging family members in open discussions about the wealth, its purpose and the values on which it is based.
Frank also believes successful generational planning requires a flexible approach: “You don’t know what’s going to happen with inheritance tax, income tax, all that stuff. You don’t know what’s going to happen in two months, much less 10, 20, 50 years. I think staying flexible and planning with that in mind is key to dealing with unexpected changes,” he said.
With the Federal Reserve (Fed) rate-cutting cycle and on the brink of an uncertain election, investors are likely thinking about how to optimize their portfolio positions over the coming year. While it’s impossible to predict exactly what the future will hold, you can take a look at your cash holdings and determine if you have enough or too much. If you have too much, it’s worth considering whether it makes sense to put some into the market.
Of course, it’s healthy to remain flexible and anticipate the impact political developments may have on your finances. But it’s also important not to lose sight of the bigger picture. “Keeping your long-term goals in mind can help you put short-term market fluctuations into perspective,” says Frank.
As you head into the unknown, it may be worth consulting with financial professionals and advisors who can help you create or tailor a plan to meet your personal and business financial needs.
