With less than two weeks to go to the most publicized Midterm Elections in many a year, we wanted to share a few key outcomes and the likely effect of three issues that could affect all retirees and our economy in general.
Potential Impact of Republican control of the Senate & House
First, a Republican resurgence and control in the Senate and House would manifest new legislation to reopen public lands for the exploration and development of domestic gas and oil. Most economists agree that this is central to reversing the upward trend of inflation. However, this runs diametrically opposed to the Biden administration’s core constituency, the Green Agenda far left. This bill would almost certainly be vetoed, and without a two-thirds majority in either chamber of Congress, ending up in a stalemate and no movement in either direction on energy.
Compromise and Collaboration Needed
Look for the Republicans to tie this pursuit to an ‘All of The Above’ Energy Bill with tax motives to support advancement in wind, solar, geothermal, and nuclear to pressure Democrats and the President into supporting the Bill. Failure to do so would further higher prices at the pump, perpetuate large Winter gas bills, continue the upward trend of inflation, and slow the real estate market, the cornerstone of economic growth, with a continuation of high-interest rates dictated by the Federal Reserve which was handed sole responsibility to control the highest increase Cost of Living since the Carter Administration.
Look for something that both would like to pass in order to each claim victory.
Implication on IRS Jobs and Taxes
Next, as for those 87,000 IRS agents that were going to be hired as a result of the Inflation Reduction Act passed last month, don’t bet the house on it. Republicans will vote to either remove, defund, or both this act. Congress controls the power of the purse and thus which elements receive funding going forward. The attack on taxpayers to fund the current agenda will not happen. In fact, it is not likely that any tax legislation will pass due to the competing interests of the President and Congress. This means that the Tax Cuts & Jobs Act tax cuts passed in 2017 will sunset on January 1, 2026. Individual tax rates will return to the old maximum of 39.6% from 37% today, 65% of households will see an increase in taxes, and the estate tax unified credit (amount of net worth exempt from Federal Estate Taxes) will reduce from over $12,500,000 per person in 2025 to just over $6,000,000. Look for Republicans to pass tax legislation that will be vetoed and as with energy policy become the focus of conservative pundits in the next presidential election.
The Stock Market Likes Predictability and Stalemates
Lastly, historically the stock markets like stalemates. It allows investment managers to know where to place their bets in the business environment and markets. Between the impasses on Capital Hill and potential change in energy policy, the markets could stabilize. However, we won’t see a complete return to old heights until energy policy changes, gas prices reduce, and the root cause of inflation is mitigated. As for interest rates, don’t look for a drop until a widespread reduction in consumer prices is manifest. Look for certain commodities, private equity, inflation protection securities, hedges, and certain types of real estate to continue producing positive returns. It’s a good time to take long-term capital losses and use these alternatives until signals point us back toward equities.
William R. Lloyd, CFP®, ChFC, AIF®, CPFA, M.Ed. is a thirty-year financial advisor specializing in advanced tax strategies.
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