Now that Republicans have taken over the House and have gained seats in the Senate, what does this mean for investors?
The biggest change on everyone’s minds seems to be whether the Bush-era tax cuts will be extended at the end of this year. The answer, says Timothy M. Steffen, Financial & Estate Planning Manager for Baird’s Private Wealth Management group, is unlikely to be resolved anytime soon, leaving more uncertainty in its wake.
First off, he added, newly elected officials will not take office until January, and those still in office won’t necessarily feel motivated or have the time to pass legislation extending the 2001 and 2003 cuts, which are scheduled to expire Dec. 31. As a result, Steffen expects the tax cuts will be allowed to expire at the end of the year, with Congress revisiting the issue in January.
“Despite the outcome of the election and gains made by Republicans, virtually all taxpayers should plan for higher federal income taxes in early 2011, while continuing to monitor the situation and its implications closely,” said Steffen, in a statement on Wednesday. “[We] would not be surprised if legislative changes are a long time in the making,” though he does expect any eventual changes to be retroactive.
Steffen also warns about greater payroll tax withholdings, tax rates on long-term capital gains, tax rates on dividends as a result of this income no longer receiving preferential tax treatment, and the return of the federal estate tax to its highest level in almost 10 years. (Read more about how advisors are trying to deal with these changes here)
Another change investors may not be thinking about is how investment behavior changes based on whether their preferred political party is in office. In fact a recent University of Miami School of Business Administration study found that investors are more likely to feel optimistic about financial markets and adjust their investment behavior correspondingly if their preferred political party is in power. Given the changes that will result from the Nov. 2 midterm election, the research implies Democrats will make bigger investment mistakes and should be more cautious, according to the research. On the other hand, Republicans are likely to make wiser investment decisions than those they made prior to the election, the research found.
“We found that when investors' preferred party was in control, they felt better about the economy and viewed domestic markets as undervalued and more likely to deliver higher returns,” said Alok Kumar, Cesarano Scholar and professor of finance at the University of Miami School of Business, in a press release on Wednesday. “This drove them to hold more domestic stocks and take more risks. Ultimately, their portfolios performed about 2.7 percent better than those of investors preferring the opposing party.”