Know Your Finances: Mid-term elections are good for the stock market

Posted by Ellen Le on October 6, 2010

Double-dip is good for eating ice cream, but not so good for
the economy. Depending on whom you
talk to, the economy is either falling apart, or is steadily improving. And if
you are still unsure, the National Bureau of Economic Research tells us that
the recession officially ended in June of 2009.

This recession was the longest reported recession since the
Great Depression. It lasted 18 months and knocked the gross domestic product down
2.8 percent on an annualized basis and destroyed 8 million jobs. A single dip of this is plenty filling.

The stock market has been extremely volatile this year.
Though not quite as wild a ride as in 2008 and 2009, the day-to-day uncertainty
has soured many investors faith in stocks. If you can believe that the stock
market digests all available economic information and predicts future strength
or weakness in the economy, then September’s rally should give you some
comfort. Historically on average
September is normally the worst performing month of the year (December is the
best!), yet this September has been the best performing one since 1939.

As we are in the final stretch before November’s mid-term
elections, we can look for the rhetoric to intensify. We expect to see a bill
that extends the Bush Administration’s tax cuts for two years and may even
include a longer extension for middle-class tax cuts.

There are two pieces of legislation up for debate, the
Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The 2001 bill created a series of lower tax brackets: 10
percent, 15 percent, 25 percent , 28 percent , 33 percent and 35 percent. These lower brackets
will be replaced with higher rates 15 percent, 28 percent, 31 percent, 36 percent
and 39.6 percent unless they are extended. If the two bills were to expire, in
2011 relief from the marriage tax penalty will go away, the child tax credit
will be cut in half, and phase-outs of the personal exemption for itemized
deductions will be eliminated.

Starting in 2011 the tax rate on qualified dividends will be
subject to ordinary income tax rates ranging between 15 percent and 39.6 percent.
The top tax rate on capital gains will increase from 15 percent to 20 percent.
And if nothing is done to the estate tax, in 2011 the federal exemption level
will be $1 million with a top tax bracket of 55 percent.

The Tax Foundation, which is a non-partisan education
foundation, estimated that a median family of four saved about $2,200 in
federal taxes each year with the Bush tax cuts.

The crux of the debate centers around whether or not to let
the tax cuts expire on just the wealthy (individuals earning more than $200,000
and couples earning more than $250,000). While it is estimated doing so will
save the government $700 billion over 10 years, the question is if the tax
hikes will affect small business owners and their ability to hire workers and
invest in their businesses.

According to the Joint Committee on Taxation there are about
750,000 individuals who report business income over $200,000 or $250,000 on
their tax returns. Though no one can determine with accuracy how many jobs are
really created by small businesses, it’s the psychology for people that
matters. Business income, home values, and investments are all down and another
hit to small business owners feels like yet another burden at the current time.

It may sound surprising, but history tells us that it
doesn’t matter which party wins the election. Over the last 20 election cycles since 1929, the average
cumulative gain over the upcoming 3-quarter period starting in October is a
strong 18 percent. One reason this period is so healthy is that most recessions
occur in the first one or two years of a Presidential term. By mid-term,
political and monetary efforts to get the economy back on a healthy footing are
top priorities. Another reason that the stock market is usually positive during
this time is that people feel hopeful that a newly elected Congress will make
positive changes. Losses in the 4th quarter do occur after mid-term elections,
but they are rare.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.