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5 Things I'm Watching Post Election

With the dust settled from our recent election, we can look forward to see what we can expect to happen. It was a fairly broad and sweeping result for the Republicans who have secured the White House, Senate, and the House of Representatives. Having control of all three branches will make it much easier to pass key pieces of legislation. I am no political analyst by any means so I won’t try and pretend I know what will be enacted, but here are some things I will be keeping an eye on in terms of impacting your personal finances. 1.      Taxes The updates to tax rates and tax brackets enacted in 2017 as part of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Both candidates campaigned on the always popular premise of lower taxes. Whether this will be a simple extension of the rates about to expire or a more thorough overhaul remains to be seen but this almost seems like a given that we will see something on this front.  Also related to taxes were campaign pledges to eliminate taxes on things like Social Security, tips and overtime.  As part of the TCJA, we also saw limitations on many itemized deductions like State and Local taxes by putting a cap of $10,000 on this. The cap on these deductions is why most people now just take the standard deduction. Will we see some softening on this? Continuing the current rates extends the window of time for Roth conversions at attractive rates and also eases concerns about possible estate tax planning by keeping the exemption amount high enough that very few people have to worry about it. 2.      Tariffs Tariffs were a key part of the first Trump presidency economic plan and it sounds like they will be an even bigger part this time around. He has promised much more widespread tariffs and at much higher rates than what was implemented in his first term. Those original tariffs have stayed largely in place and the Biden administration even expanded them on a group of Chinese products. The level of tariffs discussed during the campaign would increase the existing tariffs by a factor of 6 to 7 times. This level of tariffs would undoubtedly have a major economic impact. The government would collect increased tax revenue based on the tariffs but the price of those goods then goes up which reduces access to lower cost goods for consumers. This is why there is a concern about the possible reemergence of inflation. Also, the countries we impose tariffs can retaliate and impose higher tariffs themselves on US products shipped overseas. This can reduce sales and profitability of the companies selling those products which is not good for the employees. This is the most controversial of the proposed economic policies as most economists think the tariffs will be a net negative overall to the economy and even many Republicans seemed hesitant about the proposed scope. Unlike changes to tax laws, tariffs do not need approval from Congress making it more likely some degree of tariffs are put in place. We will have to see how widespread and what the eventual impact is. 3.      Inflation For many, the economy was the top issue for them when it came to voting. By almost all measures, (stock market, GDP, unemployment, job growth) the US economy is actually in pretty good shape. But, and this is a big but, inflation from 2022 lingering into 2023 has impacted our cost of living to a degree where many feel the economy is not working for them. Now the question is, what can be done to lower inflation? Well, inflation is already back to reasonable levels at about 2.5% The problem is the cumulative effect of 2022-23 inflation. No one benefits from high inflation. Consumers get squeezed and have to start making choices on what they spend on. Everyone will make different choices but that results in lower sales volumes for almost every product across the board or you may still purchase a given product but switch to a lower priced brand. To fix this would require lowering the prices we are currently paying for goods and services. This may prove very difficult though. There is no magic button to easily roll back prices and disinflation can have some damaging effects. Let’s use the oft cited “price of bacon is 50% higher” argument. There is no argument food prices are much higher now than pre-pandemic. But, can you simply just mandate that all grocery stores drop their prices on bacon back to 2021 levels? They may be part of the problem but are also likely paying higher prices themselves to get that bacon into the store and on the shelves. So can we mandate that grocery stores possibly lose money or maybe only break even when they sell us bacon? That doesn't seem right. Then we have to factor in the food companies like Swift, Tyson, Kraft Heinz, Coca Cola, Mondelez, General Mills, etc… How much in extra profits did they take during these past few years or are they dealing with higher costs themselves? How about the food wholesalers, the meat packers, farmers and the feed companies that sell food to the farmers for the pigs? This gets complicated very quickly. If we just unilaterally reduce company profits by mandating they lower prices there are likely some ugly unintended consequences of that. The answer here more likely rests in the hands of the consumers. Go back to Economics 101 and price is the meeting point of supply and demand. If consumers aren't willing to pay $8 for a package of bacon, stop buying bacon. I know it's hard because bacon is freaking delicious but guess what, as a general rule companies struggle to stay in business if no one buys their product. Make them feel the pain and you'll probably see the price start to drift back downward eventually to a point where people are willing to pay again. On the other hand, if you keep paying $8 for bacon, there isn't much incentive for anyone in that food chain to drop prices. I will be very interested to see how this plays out and what direct action, if any, can be taken by the federal government on this. 4.      Deficits This one has a lot in common with taxes. Both candidates promised many things during the campaign in an attempt to woo the voters. These promises come with a price tag though. In addition to a likely extension in some form of current lower tax rates, there were promises of no taxes on tips, Social Security, and overtime. There were also promises that would come from increased spending. We are already running very large deficits so the combination of taking in less tax revenue and increasing spending only adds to that problem. The goal is that with lower taxes, we stimulate economic growth and that growth results in increased tax revenue that offsets the cost of the tax cuts. Taxes are something that requires legislation by Congress and budgets/spending bills all come out of Congress as well so we will have to see what gets agreed to. There are other initiatives as well such as the efficiency effort being led by Elon Musk that could reduce government spending and it remains to be seen what the overall net impact of all of this will be. The concern with increasing deficits is that we will inevitably get to the point where we as a country struggle to pay our debt obligations which leads us to the next item I’ll be watching. 5.      Interest Rates Even though the Fed has cut interest rates by .75% we have not seen a decline in market interest rates. In fact, interest rates have actually been going up. Lower interest rates are generally seen as a catalyst for the economy as it makes it more affordable to borrow money for major purchases like cars and houses or capital projects for businesses. So tying this back to the previous point, market interest rates have been creeping up as concerns of being able to pay our debts make our government bonds more risky, and therefore they will carry a higher interest rate to correspond with the elevated risk. There also was talk about increased government involvement with the Fed. The Fed chair is appointed by the President and approved by the Senate but the Fed itself is an independent organization tasked with setting monetary policy for the country in an attempt to manage inflation and employment. Government interference over this independent body would likely result in a negative reaction in the bond market. We also have the previously mentioned point of inflation rearing its head again. And what does the Fed do to combat inflation? We just went through this in 2023 and that is to raise interest rates. Summary These are things I am watching. To be clear, I am not predicting that any of these will actually happen or what the impact of any policy will be. In reality, we will likely see a mix of positive and negative reactions to various policies.  These are complicated, intertwined issues and we may not fully understand the impact of any policy for several years. Meanwhile, I will be keeping tabs on this to see how any actual policies or legislation impacts your personal finances.   7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. 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5 Things I'm Watching Post Election
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