Will the upcoming 2024 elections spell volatility in the markets?

As the 2024 general election draws closer, it’s time to consider how the outcome could impact your financial future. The policies that emerge post-election could significantly shape your investments and financial-planning strategies in the coming years. So, here’s a look at three key areas investors should watch:

The new Congress will be tasked with reforming the tax code as key Tax Cuts and Jobs Act (TCJA) provisions are set to expire at the end of 2025, and taxes could rise for some, if certain provisions are not extended:

• Individuals could see higher income tax rates that revert back to 2017 levels.
• The standard deduction could fall to $13,000 for joint married filers, from $24,000¹.
• The estate tax exemption would decline to $5 million per decedent, from $10 million¹.

That said, both Democrats and Republicans have strong interests in keeping certain taxes low, so it’s likely that Congress will take a measured approach to which provisions will be extended and which will lapse.

Investor implications: If individual tax rates do increase, you may see tax-advantaged investments outperform as investors seek out tax-haven assets. For example, the lower tax rate on preferred securities dividends and municipal-bond interest payments’ exemption from federal income taxes could make both types of assets more attractive to some investors.

Social Security, a critical safety net for over 66 million Americans, is under pressure due to a diminishing ratio of workers (whose taxed wages help fund the program) to beneficiaries. According to a June 2023 Congressional Budget Office report, Social Security revenues are projected to cover just 75% of the program’s scheduled outlays by 2034.

The 2024 election could thrust the issue of Social Security insolvency back into the spotlight, with the major parties offering different solutions: Democrats, for their part, have proposed a new tier of wage tax for individuals with incomes above $400,000, while some Republicans have suggested raising the age at which people become entitled to full Social Security benefits, known as “full retirement age” (FRA), from 67 to 70.

Social Security shortfalls may occur as early as 2034

Investor implications: A higher FRA could motivate some investors to increase their retirement savings if they are counting on Social Security to help fund living expenses in retirement. Investors concerned about their Social Security benefits—or who simply want to shore up their nest egg as retirement approaches—may opt for investments aimed at preserving capital, such as:

• money-market mutual funds,
• ultra-short bond funds and
• certain types of annuities.

Health care policy remains a top concern among voters, with the major parties taking divergent views over issues like drug costs and access to medical care. Some Republicans, for example, aim to dismantle the Affordable Care Act’s (ACA) state-exchange insurance system post-election, while Democrats are almost certain to continue supporting it.

Also likely to be in focus: the recently passed Inflation Reduction Act (IRA), which allows the federal government to negotiate with pharmaceutical companies on prescription drug prices, a provision Democrats are likely to continue to support as they call for lower drug prices amid rising medical costs.

The cost of medical care has outpaced CPI for all goods and services

Investor implications:

• ACA: The law may face scrutiny in a GOP-led government, but an unwinding of the existing state exchanges is unlikely. In a Democratic-win scenario, lawmakers are likely to continue to support the ACA’s policies, which could provide a tailwind for healthcare stocks like managed-care companies and their beneficiaries, such as retail pharmacies and certain insurance providers.
• IRA: While a Republican-favored outcome might bode well for pharmaceutical makers, a Democratic-led government may take further action to curb prescription drug costs. This could weigh on pharmaceutical stocks, but also create attractive entry-points for investors on the hunt for value-oriented opportunities in the otherwise robust pharmaceutical sector.

With the election still months away, much can change. Even so, early preparation may help investors navigate the outcome.

• Potential tax changes could spur demand for tax-advantaged securities.
• Policies addressing Social Security shortfalls may incentivize investors to take more steps to shore up their retirement nest egg.
• Efforts to change health-care policies, meanwhile, could impact the performance of managed-care and pharmaceutical stocks.

When making any investment decision, keep in mind your risk tolerance and investment goals.

¹ These figures are adjusted annually for inflation.

The source of this article, US Policy Pulse: 2024 General Election Results and the Individual Investor, was originally published on December 19, 2023.