How the Election Could Affect Your Money: From a Financial Advisor

The phrase "It's the economy, stupid," coined by James Carville during Clinton's 1992 campaign, remains strikingly relevant today. Unemployment is near record lows, inflation has fallen from a post-pandemic high of 9% to 2.5%, and the stock market continues to soar. Interest rates and energy prices are also decreasing, adding momentum to economic growth. These trends hint that we may be in the middle phase of the business cycle rather than approaching a recession.

Yet, many Americans are still dissatisfied.

A recent Gallup poll showed that most Americans see the economy as their biggest worry. Almost 45% of them call it "poor."

This isn't surprising. Every trip to the grocery store and every purchase of school supplies reminds us that prices are still rising. Even looking at insurance bills makes our wallets feel lighter.

"Consumers’ purchasing power has decreased by 2.5% since the pandemic, compared to where it would have been if pre-pandemic gains had continued," says Collin Crownover, lead inflation analyst for Fidelity's Asset Allocation Research Team. "As a result, the average consumer feels worse off in real terms than before the pandemic."

Can the policy proposals of either presidential candidate reverse this trend? Let’s explore their potential impact on your finances.

The Economy and Markets

The economy is important for investment strategies. Former President Donald Trump and Vice President Kamala Harris have different ideas for promoting growth.

Trump promotes lower taxes and deregulation while imposing tariffs to protect American businesses. Harris suggests giving more support to small businesses and the middle class. She also wants to raise taxes on corporations and the richest people.

However, it’s important not to base investment decisions purely on political preferences or campaign promises.

While elections may trigger short-term market volatility, there hasn’t historically been a significant long-term impact on economic growth or market performance based on election outcomes. In fact, the economy and stock market have consistently grown under various combinations of presidential and congressional leadership.

Taxes

Tax policies can greatly affect personal finances. Changes in tax laws can quickly impact your income.

Former President Donald Trump aims to extend key elements of the 2017 Tax Cuts and Jobs Act (TCJA), set to expire in 2025. This would keep the top income tax rate at 37%, maintain a higher standard deduction, and keep the capital gains tax at 20%.

Trump supports raising the limit on mortgage interest deductions, which is currently $750,000. He also wants to increase state and local tax (SALT) deductions, which are now $10,000. Additionally, he aims to eliminate taxes on Social Security benefits.

Vice President Kamala Harris supports keeping lower income and capital gains tax rates for people earning $400,000 or less. However, she wants to raise the top income tax rate to 39.6% for higher earners. She has also backed a "billionaire’s tax," imposing a minimum 25% tax on those with wealth exceeding $100 million.

Harris may think about removing the step-up in basis for inheritances. She could also tax unrealized capital gains and end backdoor Roth conversions. She also suggests increasing long-term capital gains and net investment income tax rates to 33%. This would apply to people with incomes over $1 million.

Both candidates advocate eliminating taxes on tips and increasing the Child Tax Credit. Harris wants to raise the credit to $3,600 for each child. She also proposes a one-time bonus of $6,000 for newborns. In contrast, Trump’s running mate, JD Vance, suggests increasing the credit to $5,000.

In terms of corporate taxes, Trump has proposed reducing the top rate to 15%, while Harris would raise it to 28%.

These proposals might increase the federal deficit, which is already around 7% of GDP. This makes it hard for them to pass in a divided Congress.

If you think you will be in a higher tax bracket next year, consider some strategies. You might explore Roth conversions, gifting, or charitable donations. These can help lower your estate’s taxable value.

Consumer Prices

The positive news: Food inflation has eased to 1.2% annually, down from a peak of 9.4% in June 2021. However, the downside is that grocery prices have still risen 27% since the pandemic started in 2019. Every grocery trip reminds us of inflation. Unfortunately, these higher prices may persist.

In recent months, Trump has proposed a 10% tax on all imported goods. He suggested that tariffs on Chinese products could go as high as 60%. This could potentially drive U.S. inflation up by one percentage point. Harris’s plan to lower food prices by punishing companies that raise prices unfairly may be hard to enforce.

Housing

With 30-year fixed mortgage rates still above 6% and limited housing supply, prices continue to climb. As of Q2 2024, the median home price in the U.S. reached $440,000. At the same time, rents surged by 30% between 2019 and 2023, significantly outpacing wage growth.

A recent Redfin poll showed that 80% of voters are worried about housing affordability. This finding is not surprising. Among younger voters, 91% say it is their top issue.

To help with this, Vice President Kamala Harris has suggested a $25,000 tax credit for first-time homebuyers. She also proposed a $10,000 credit for other first-time buyers. She also wants to boost housing supply. She plans to encourage builders to create 3 million new rental units and starter homes with tax credits.

Boosting supply might help, but the homebuyer tax credit could raise prices. It does this by giving first-time buyers more purchasing power.

Former President Donald Trump wants to lower costs for builders and open federal land for construction. However, Crownover warns that Trump's proposed tariffs could increase the cost of building materials. Additionally, his immigration policies might reduce the labor pool, which depends a lot on immigrant workers.

Ultimately, relief could come from falling interest rates. Mortgage rates, now 1.75 percentage points lower than their late 2023 peak of 7.8%, could help ease the burden on buyers. Lower rates could encourage homeowners with low fixed rates to sell. This would increase the number of homes available for first-time buyers.

Health Care

Health care affordability remains a major concern for voters, especially as premiums and Medicare drug prices continue to rise. Consumers are feeling the strain. Annual health care spending per person is expected to nearly double. It will rise to $21,927 in the coming years, up from $14,423 today.

To address these issues, Vice President Kamala Harris has proposed increasing subsidies for state-run health care exchanges. She also supports increasing the number of prescription drugs with price caps under Medicare Part D. She wants to close the “donut hole” that makes seniors pay high out-of-pocket costs for medical expenses.

Former President Donald Trump has often criticized the Affordable Care Act. He supports cheaper catastrophic plans that provide limited coverage.

He also stresses the need for clearer pricing from health care providers. He wants to lower drug prices for seniors. However, he has not shared specific details of his plan yet.

Energy

Falling energy prices have helped the economy in recent years. However, prices are still higher than they were before 2022. The Ukraine War caused a big price spike during that time. "While gasoline prices have dropped since the war’s peak, they’re still much higher than before 2022, and people remember those lower prices," says Maurice FitzMaurice, manager of the Fidelity® Select Energy Portfolio (FSENX).

In a recent speech in Michigan, former President Donald Trump promised to cut energy costs in half. He plans to do this by increasing fossil fuel production. This includes more drilling, fracking, and building pipelines.

Vice President Kamala Harris has always focused on moving to renewable energy. She supports subsidies for renewable sources and electric vehicles. At the same time, she opposes fracking and expanding pipelines. However, more recently, Harris indicated she might support fracking as a way to reduce energy costs.

Despite these promises, implementing such sweeping changes may be challenging in a narrowly divided Congress. In the short term, FitzMaurice believes energy prices will be more influenced by geopolitics: "Saudi Arabia, a key OPEC member, is working to keep oil prices high, and continued tensions in the Middle East could disrupt supply from some producers."

Focus on Long-Term Financial Planning

It is important to understand each candidate's policy proposals. However, the president's ability to make changes depends on congressional elections. The party that controls the Senate and the House will play a big role.

No matter who takes office, it's crucial to prepare for various potential outcomes. Creating a long-term financial plan with the help of a financial advisor or tax professional can help you handle various economic situations.

This is important during this election cycle and in the future.

Sources:

https://www.fidelity.com/learning-center/personal-finance/2024-election-and-your-money

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information

The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. This information is subject to change. Tax policy details often change as proposals are adjusted, or as candidates release more comprehensive plans. These proposals will be subject to negotiation with Congress, making their final enactment dependent on the political landscape post-election.