How Midterm Elections Can Influence the Markets
Midterm elections are always important. The outcome can determine which party has control of the House and the Senate. The results can send a signal for the next presidential election. Midterms can also influence the markets as well. How did the markets perform during part midterm elections? Based on data from Bloomberg, going back to 1962 the market has significantly underperformed in the twelve months leading up to the midterm election. On average, the S&P 500 has returned 0.3% over these twelve-month periods compared to 10.7% during other twelve-month periods not surrounding midterms. However, in the period after the midterms since 1962, the S&P 500 has outperformed other similar periods. For the three months after the election, starting November 1: The average performance following the midterm elections was a gain of 7.3% versus a gain of 2.9% over other three-month periods. For the six months after the election, starting November 1: The average performance following the midterm elections was a gain of 15.1% versus a gain of 4.2% over other six-month periods. For the twelve months after the election, starting November 1: The average performance following the midterm elections was a gain of 16.3% versus a gain of 6.4% over other six-month periods. Sam Stovall, the Head of US Equities Strategy at CFRA says, “Second and third quarters of midterm election years are by far the worst quarters of the sixteen-quarter presidential cycle.” How midterm elections impact markets There is a lot of debate as to why markets tend to underperform leading up to the midterms, then outperform in the months after the elections. One theory surrounds the uncertainty as to which party will retain or gain control of Congress after the midterms. This could impact a number of social and economic policy initiatives after the elections. However, studies have shown the party in control of Congress has no real impact on market performance. A more likely factor in market performance leading up to the midterms is the state of the economy. In years where the economy was in bad shape the market performance leading up to the midterms was poor. As a case in point was the -31.8% performance of the S&P 500 in the twelve months leading up to the midterms in 1974. This was a period of high inflation among other issues. If we exclude the five midterms during the 1960s and the 1970s, the S&P 500 gained an average of 8.1% in the twelve months leading up to the midterms, more in line with the index’s overall twelve-month performance. As we look towards the 2022 midterms, there are several possible outcomes: Republicans win control of either the House or the Senate. This would likely result in a logjam for any legislation the president and the Democrats want to enact. Republicans win control of both houses of Congress. This would limit opportunities for bipartisan cooperation and be a strong headwind for the president’s agenda. Democrats retain control of both the House and the Senate. This would be a bit of a status quo, there is more likelihood of some bipartisan cooperation for the president’s agenda. Any of these outcomes could have either a positive or negative impact on the markets. According to Stovall, “The last quarter of this year, first two quarters of next year are by far the strongest in the sixteen-quarter presidential cycle because the uncertainty surrounding midterm elections has run their course. Also historically, we have never posted a decline from November 1 of a midterm election year through November one of the subsequent year.” Based on this assessment the fact that the election will be behind us could be the most important factor for the markets. Will your investments be impacted? It is hard to say if the results of the 2022 midterms will impact your investments. Political developments can have an impact at any time, not only surrounding midterm elections. Long-term investors should not be overly concerned about the results, however. There are always factors in politics, the economy and world affairs that can impact your investments in the short-term. As a long-term investor your focus should be on your asset allocation, your risk tolerance and achieving your financial goals. If you are concerned about the potential impact of the midterm elections on your portfolio, this is a good time to contact your Wedbush financial advisor to discuss your portfolio and to be sure your investments are properly allocated and aligned with your goals. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Important Changes for the 2022 Tax Year
There are a number of tax changes for the 2022 tax year. Many of these changes are due to normal bumps for inflation. In late 2021 the IRS announced annual inflation adjustments for more than 60 tax provisions for 2022. Here are some important tax changes that are in effect for the 2022 tax year. Tax bracket increases There are no changes in the marginal tax rates for 2022 from the 2021 levels. They range from 10% to 37% on the top end. However, the upper limits of most brackets increased for 2022. Here are some examples: For single filers, the top end of the 22% tax bracket increased to $89,075 from $86,375 in 2021. For those filing married and joint, the top end of the 32% tax bracket increased to $431,900 from $418,850. For single filers the 37% bracket increased to incomes over $539,900 from incomes over $523,600 in 2021. For those filing married and joint, the top end of the 37% bracket includes incomes over $647,850 up from $628,300. What this means is that within all of the tax brackets, there is extra room for 2022 versus 2021 before taxpayers move into the next marginal tax bracket, saving them money over the same level of income for 2021. Capital gains tax rates increase For 2022, the top end of the various capital gains tax brackets has all increased a bit over those in 2021. The capital gains tax rates remain at 0%, 15% and 20%. Meaghan McKenzie Managing Director, Investments at Wedbush Securities Seattle office says, “We have had a bear market this year and with all markets there is always a silver lining. With bull markets people like capital appreciation but there is always a discussion of capital gains issues. In bear markets you have capital depreciation and sometimes that opens the door for tax planning opportunities. Whether or not this applies to you, talk to your advisor now to get personalized advice for your circumstance.” Employer-Sponsored Retirement Contribution Limits Increase Contribution limits for 401(k) contributions have been increased to $20,500 for 2022 from $19,500 in 2021. For those who are 50 or over at any point during the year, they can contribute an extra $6,500 in catch-up contributions which is unchanged for 2022. Traditional IRA Income Restrictions to Deduct Contributions Increase For those who are covered by a 401(k) or other type of retirement plan at work, there are income restrictions that limit that amount they can contribute to a traditional IRA on a pre-tax basis. Income is based on modified adjusted gross income (MAGI) which is adjusted gross income plus certain deductions and excluded income items. Filing status 2021 MAGI 2022 MAGI Deduction Limits Single or head of household $66,000 or less $68.000 or less Full deduction up to contribution limit More than $66,000, but less than $76,000 More than $68,000, but less than $78,000 Partial deduction $76,000 or more $78,000 or more No deduction Married filing jointly $105,000 or less $109.000 or less Full deduction up to contribution limit More than $105,000, but less than $125,000 More than $109,000, but less than $129,000 Partial deduction $125,000 or more $129,000 or more No deduction Married filing separately Less than $10,00 Less than $10,00 Partial deduction $10,000 or more $10,000 or more No deduction Income Limits to Contribute to a Roth IRA Increase Filing status 2021 MAGI 2022 MAGI Contribution Limits Single or head of household $125,000 or less $129,000 or less No contribution limit More than $125,000, but less than $140,000 More than $129,000, but less than $144,000 Contribution limit phase-out $140,000 or more $144,000 or more No contributions allowed Married filing jointly $198,000 or less $204.000 or less Full deduction up to contribution limit More than $198,000, but less than $208,000 More than $204,000, but less than $214,000 Partial deduction $208,000 or more $214,000 or more No deduction Married filing separately Less than $10,00 Less than $10,00 Partial deduction $10,000 or more $10,000 or more No deduction Standard Deduction Increases for All Filing Statuses The standard deduction is a deduction open to all taxpayers who are not able to itemize deductions on their return. For 2022, the amount of the standard deduction has increased across all filing statuses. Filing status 2021 standard deduction 2022 standard deduction Single, married filing separately $12,550 $12,950 Married filing jointly $25,100 $25,900 Head of household $18,800 $19,400 This increase allows those taxpayers who are unable to itemize to take a slightly higher deduction from their income at tax time. HSA contribution limits increase Contribution limits for HSAs (health savings accounts) have increased for the 2022 tax year. HSAs are medical savings accounts that can also serve as an additional retirement account in that the money contributed can be carried over to subsequent years if not used. Contributions are made on a pre-tax basis, withdrawals for qualified medical expenses are made tax-free. This can include Medicare premiums in retirement among a host of others. HSA contribution limits: 2021 contribution limits 2022 contribution limits Single $3,600 $3,650 Family $7,200 $7,300 Catch-up for 55 and over $1,000 $1,000 Estate and gift tax rates increase As outlined in the Tax Cuts and Jobs Act legislation, the lifetime estate and gift tax rates have increased for 2022. This allows individuals to transfer more of their estate to their heirs during their lifetimes and at their death without incurring estate taxes. The lifetime estate tax rates are set to revert back to $5 million after the end of 2025. For 2022 the lifetime exemption stands at just over $12 million per person and will increase through 2025. Consult your Wedbush financial advisor and your tax professional for help with incorporating tax planning into your overall financial and investment planning. While taxes should not drive your financial planning decisions, they are nonetheless an important consideration. 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Understanding President Biden’s Inflation Reduction Act
The Inflation Reduction Act recently signed into law by President Biden contains a number of provisions across areas such as corporate taxes, energy and climate change as well as healthcare. Major areas of focus in the legislation There are several areas of focus within the legislation as passed. Taxes There are several tax provisions in the legislation, including: A 15% alternative minimum tax is included for U.S. based corporations with at least $1 billion in revenue and non-U.S. domiciled corporations with at least $100 million in revenue. An excise tax on stock buybacks by public companies. Additional funding for enforcement by the IRS. Healthcare There were several healthcare related provisions in the legislation but the most notable was the provision that allows Medicare to negotiate maximum prices on a number of prescription medications. Pharmacy costs for Medicare Part D recipients will be capped at $2,000 per year. Additionally, insulin costs for Medicare recipients will be capped as well. Energy There are a number of energy and climate-related programs. Among these is a tax credit for electric vehicles. There is a $7,500 tax credit for new EVs and $4,000 for used EVs. There is also an extension and expansion of the carbon tax credit. There are credits to reduce carbon emissions and credits to promote expanded manufacturing capability for wind turbines, solar panels and batteries. Energy and Climate Change The EV tax credit could be a major boost for electric vehicles sales. Beside the $7,500 tax credit for the purchase of new EVs and the $4,000 tax credit for the purchase of used EVs, there is also a 30% tax credit for the purchase of clean commercial electric vehicles. Additionally, there are $1 billion in grants towards the purchase of heavy duty EVs such as buses. These credits and incentives could be a boon to vehicle manufacturers that hop on the bandwagon. On the other hand, those who don’t could see their market share eroded if these credits and incentives spur EV sales in the way the administration hopes. Besides the EV credits, the legislation offers direct consumer rebates for buying heat pumps and other energy efficient home appliances. Additionally, there are tax credits for installing rooftop solar panels. Both of these incentives could be a boon to companies in the clean energy space and industries related to this. Lowering of prescription drug costs The White House estimates that 5-7 million Medicare beneficiaries could see their prescription drug costs go down due to a provision in the legislation that allows Medicare to negotiate prescription drug costs with drug makers. Additionally, they estimate that 3.3 million Medicare beneficiaries will see their cost for insulin capped at $35 for a month’s supply. Additionally, there is a provision that mandates that drug manufacturers who increase their prices more than the rate of inflation rebate the amount that exceeds the level of inflation for Medicare beneficiaries. To the extent that these and other initiatives in the legislation result in lower revenues for the drug companies, this could reduce revenues and profits for some drug makers, potentially impacting their stock price. While the provisions mostly pertain to prices for Medicare beneficiaries, these initiatives could reduce drug manufacturer’s bottom line. Taxes There are several provisions of the legislation related to taxes. One places a 1% excise tax on the fair market value of stock repurchased by publicly traded companies in stock buybacks. There are a number of rules determining situations in which a buyback would or would not be subject to this tax. Each company contemplating a repurchase of their stock would need to assess the financial impact of this tax to determine if the transaction still makes sense for their shareholders. The 15% minimum tax the legislation imposes on corporations with at least $1 billion in revenue could reduce profits for some companies. Whether this will have a material impact on their bottom line remains to be seen. The legislation also increased funding for the IRS to help increase tax compliance, conceivably among the wealthiest U.S. taxpayers. To the extent that people are already in compliance with their tax obligations, this shouldn’t have an impact on them. One area that could help many taxpayers is that some of the money could be earmarked to help improve IRS systems that could help speed up the processing of tax refunds for taxpayers entitled to one. There are some aspects of the Inflation Reduction Act that could benefit certain industries. Talk with your Wedbush Financial Advisor to discuss these potential opportunities to determine if they are a good fit for your portfolio. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.