Wednesday, October 24, 2012

Election-Related Investing Themes


By now you know that America is electing a new president on November 6.  No matter which side one is on, we know that one of the candidates is going to be elected.  Like me, you may be asking yourself – “What are some of the possible effects on investing and will those effects be different depending on the winner?”

As you may know, it often is not the event itself that moves markets but the perception of the effect the event may have.  The 2012 election is no different in this regard, so ignore the promises let’s focus on the likely outcomes.

Here are the Big Picture issues as we see them from an investment perspective:

Issue
Obama Re-Elected

Romney Elected
Regulation
Environment
Financial

Minus
Neutral or minus


Plus
Plus
Energy
Carbon
Alternative
Nuclear

Neutral/mild minus
Plus




Neutral

Plus
Minus
Tax
Neutral/mild minus

Neutral/mild plus
Social Security
Neutral

Mild plus
Medicare
Plus

Minus
Medicaid
Plus

Neutral
Fiscal Cliff
Tax Rates
Sequestration

LT minus
LT minus
ST Neutral

LT plus
LT plus
Health Care
Hospitals
Doctors
Med Technology

Plus
Minus
Minus


Minus
Plus
Plus
Defense


LT neutral/minus
ST Neutral

LT plus
Exports
Plus

Minus

ST = Short Term – less than 6 months
LT = Long Term – more than 6 months


Drill-down to sectors/industries:

Sector/Industry
Obama Re-Elected

Romney Elected
Oil & Gas
Neutral

Plus
Coal
Minus

Plus
Alternative
Plus

Minus
Financials
Neutral/mild minus

Plus
Transports
Autos
Rail

Minus
Minus


Plus
Plus
Health Care
Hospitals
Pharma
Med Tech

Plus
Neutral/Minus
Minus


Minus
Plus
Plus
Defense


LT Minus
ST Neutral

LT Plus
Exports
Aerospace
Technology
Autos
Food
Agribiz
Processers
Machinery
Sofware/IT
Nat Gas
Plus

Minus
Housing

Neutral

Fiscal Cliff Diving


“A committee is a group of people who individually can do nothing, but who, as a group, can meet and decide that nothing can be done.”
-      Fred Allen, comedian

Got a problem?  Form a committee to study it.  The committee will study the problem for as long as it takes.  The “take” usually involves large sums of money and when the committee is in Wash D.C., the money involved is yours and mine.

You’ve probably heard plenty of press about the coming “fiscal cliff” that the U.S. is marching towards on December 31, 2012.  The problem is a “two-fer”, meaning there are two parts:

  1. Part One is the result of our leaders kicking the can down the road in December, 2010 to wiggle out of their inability to come to grips with the expiring tax policies of the previous administration.  A deal was cut to extend most of those policies for two more years to December 31, 2012 (but see below for items that may affect 2012 income taxes).

  1. Part Two is the result of our leaders kicking the can down the road in August, 2011 to wiggle out of their inability to come to grips with the expiring U.S. government debt ceiling.  A deal was cut to force “severe” budget cuts in a broad swath of government spending if a Joint Congressional Committee couldn’t agree on what those cuts should be.  The Committee was unable to agree on the cuts and here we are arriving at the date on which the mandatory budget cuts are to become effective – January 1, 2013.

  1. BONUS! More provisions of the Patient Protection and Affordable Care Act - aka “Obamacare” – go into effect January 1, 2013.  We’ll provide more details about these provisions in a special commentary after Election Day.

I don’t know about you, but I’m detecting a pattern here.  It’s almost a perfect storm, a financial Katrina.  You will continue to hear much hand-wringing and demagoguery from Wash D.C. about these issues because it is election season.

What You Need to Know Now
Most of these issues will not be dealt with until 2013 nor is earlier action necessary.  However, some of the income tax items on the list may – if not dealt with before year end 2012 – affect taxes due for 2012.  The following two are probably of the most importance to you:

  1. Alternative Minimum Tax (AMT) Exemption – The AMT is a separate tax system that imposes a flat tax rate on certain taxpayers.  The law contains an exemption amount (sometimes called a “patch”) which offsets the AMT for many taxpayers.  However, the exemption has not been adjusted for inflation so unless it is increased by Congress, as many as 27 million additional U.S. households will be subject to the AMT in 2012.  The AMT exemption was increased for tax year 2011 as part of the 2010 deal, but an increase for 2012 was not included.  If you are subject to the AMT in 2012, your total income tax bill will be higher than otherwise.

  1. Itemized Deduction for State and Local Sales Tax – Most states impose an income tax on their residents (only seven states – including Washington - do not).  State income taxes are allowed as an itemized deduction but an itemized deduction for sales tax paid has been at the whim of Congress.  A deduction for sales tax paid in 2011 was included as part of the 2010 deal, but not in subsequent years including 2012.  If you are not able to take a deduction for state sales taxes in 2012, your total income tax bill will be higher than otherwise.

I have to think that our leaders aren’t so polarized that they can’t get something done about these issues before year end.  But they might not.

What You Can Do About It
If you are working with a CPA or other tax professional, you should contact them to get their input on how these items might affect your taxes for 2012.  We can provide a CPA referral if you like.

We intend this information to be informative, not alarmist.  Nothing will be done in Wash D.C. on these issues until after the election.  The 2010 tax deal was signed into law December 17, 2010 and we expect anything done this year will follow a similar timeline.

I have to think that our leaders will take the pragmatic approach and solve these issues before year end.  Let’s hope they do so.