ASSESSING THE MID-TERM ELECTIONS

 

What effect could the results have on stocks and taxes?

 

GOP picks up 60 seats in the House, 6 in the Senate. The 2010 midterm elections are over and frustration has prompted change on Capitol Hill. Republicans will control the House with at least 239 seats; Democrats will retain a narrow majority in the Senate with at least 51 seats.1

Here comes gridlock. “We’re determined to stop the agenda Americans have rejected and to turn the ship around,” Senate Minority Leader Mitch McConnell (R-KY) told the press after the election.2 So will President Obama’s health care reforms be rolled back? Will federal spending be severely reduced?

Through 2012, you may not see much change at all. With Republicans controlling the House, Democrats controlling the Senate and President Obama’s veto pen at the ready, you can expect plenty of legislative stalemates.

Could gridlock benefit the markets? It could be bullish for stocks. With a conservative majority in the House, Wall Street could breathe a collective sigh of relief over the next two years, feeling less regulatory pressure and seeing fewer threats and a more business-friendly environment.

On the other hand, history suggests otherwise. Standard & Poor’s database reveals that since 1900, the S&P 500 has gained an average of just 2.0% in years featuring a split Congress. Since World War II, the average gain in such circumstances has been 3.5%.3 Here’s hoping past performance is no indicator of future results.

What can the lame-duck Congress accomplish? Republicans don’t become the majority party in the House until January … so what will happen with the Bush-era tax cuts and the estate tax?

A compromise could be in the works on the estate tax. Neither party wants to see estate taxes reset to 2001 levels. With death taxes poised to top out at 55% next year, both parties may emerge from the limbo of 2010 and reach a consensus. A CNN report suggests the maximum estate tax rate will be set somewhere between 35-45% for 2011, with the federal exemption ranging anywhere from $3.5-$5 million.4  

Both parties want to preserve the Bush-era income tax cuts. Analysts now think Congress may act to extend the EGTRRA/JGTRRA tax cuts through at least 2011.4 Will they be extended for all Americans, as Republicans want? Or just to households with incomes of less than $250,000, as Democrats want?

Two (lame duck) Democrats have proposed extending these tax cuts for all but the really rich. Senate Banking Chairman Chris Dodd (D-CT) would like them extended for households making less than $500,000; Sen. Blanche Lincoln (D-NE) has proposed setting the break at $1 million. In September, 31 House Democrats wrote a letter to their party’s leaders urging the extension of the cuts for all Americans.5  

Other matters to tackle. Currently, the unemployed can qualify for up to 99 weeks of federal unemployment benefits. The Tier V unemployment extension is set to expire at the start of December, and if it does, about 2 million Americans will lose that cushion. Additionally, the Medicare reimbursement rate for doctors will be reduced by 21% if Congress doesn’t apply its usual annual “doc fix” by the end of November, and the Alternative Minimum Tax needs its annual patch.4

It is possible that one broad year-end tax bill could address all of the above issues.   

What if the economy needs another stimulus? Given the mid-term election results, it is pretty clear that Federal Reserve will have to “ride to the rescue” instead of Congress. The GOP wants to block any new spending that adds to the federal deficit, so any initiative President Obama might propose to pump up the housing market or job market will likely be small-scale. It is hard to imagine another federal stimulus package making it through Congress between now and 2012, though a tax-cutting move might stand a chance.

Obama appeals to the business world. One last item of interest: in the wake of the “shellacking” his party took this week, President Obama spoke of mending fences with America’s business community. He now says he wants to undo Section 9006 of the health care reform law – the section that would require all businesses to issue 1099 tax forms notifying the IRS of purchases exceeding $600 starting in 2012.6

Shannon Case ChFC, CFS              Mark Slattery CFS

Securities and advisory services offered through SII Investments, Inc. member FINRA/SIPC and a Registered Investment Advisor. SII and Case Slattery Wealth Partners are separate companies.

 

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

 

Citations

1 – latimes.com/news/politics/election/la-election-results-map,0,4890426.htmlstory [11/3/10]

2 – marketwatch.com/story/republicans-to-challenge-obama-after-victory-2010-11-03 [11/3/10]

3 – marketwatch.com/story/gridlock-is-no-good-for-stocks-2010-11-02 [11/2/10]

4 – money.cnn.com/2010/11/01/news/economy/lameduck_agenda/ [11/1/10]

5 - money.cnn.com/2010/10/13/news/economy/bush_tax_cuts_possible_compromise/index.htm [10/13/10]

6 - money.cnn.com/2010/11/03/news/economy/Obama_business/index.htm [11/3/10]