Broker Check

Election Impact

November 2012

Now that this election is behind us, we can begin trying to understand the impact it will have regarding financial issues. While we will get more clarity as decisions are made, as of today, here are potential impacts to our economy, investments and decisions people are facing.

  • The ‘Tax Fiscal Cliff’: With tax rates automatically reverting back to previous levels on January 1, 2013, finding a solution to avoid across-the-board tax increases should be a priority for Congress and the President. Decisions about individual and business tax rates along with whether a long-term solution or another short-term deal is reached will have a significant impact on our economy, unemployment and national debt. A short term deal creates uncertainty and businesses will be hesitant to make long-term commitments toward purchasing equipment and hiring employees.
  • Our Nation’s debt: With basically the same government makeup, it is expected that there will continue to be a heated debate between how to implement tax increases, spending cuts and policies to stimulate job growth to lower our debt. Our Nation’s current debt levels and future obligations to Social Security and Medicare are not healthy nor sustainable. Currently, the Nation’s debt ceiling of $16.4 Trillion is expected to be reached before year-end and talks of raising it to $18.8 Trillion are being discussed. If the debt levels aren’t reduced by the time interest rates rise, our government will have higher interest payments on the debt, thus potentially increasing the total debt. Additionally, the rating agencies will most likely downgrade the ratings on our Nation’s bonds and economic health for not agreeing upon a long-term solution to reduce the debt.
  • Unemployment: With tax rates expected to rise for businesses, this could slow business growth and job opportunities. While our economy might see positive economic growth, the levels could be less and slower than we would experience during a more robust environment.
  • The Patient Protection and Affordable Care Act (“ObamaCare”): This will fully be implemented into law throughout the next few years. Businesses will determine how the law impacts their operations, costs and ability to hire and grow. In turn, the additional costs could limit businesses from hiring people.
  • Interest rates: President Obama will likely keep Federal Reserve Chairman Bernanke in place; thus the Federal Reserve will be more inclined to keep interest rates low and continue implementing Quantitative Easing policies in an attempt to stimulate the economy. Lower interest rates will certainly help home buyers and people refinancing (those that can actually qualify). On the other hand, the low interest rates are hurting people relying on dividends. Rising costs (inflation) will create a greater strain on people more dependent on dividend income.

How can people manage their finances based on the above issues? I recall a CEO of one of the investment companies we use, responding to a question about the impact of government policies on his company. He said something to the effect, I don’t make the rules, I simply learn how to make money according to the rules. I continue to believe this was a wise and positive statement. Similarly, how do you continue to achieve your financial goals?

First, identify and prioritize your goals based on importance, time frame and resources. Next, take action pertaining to the areas in which you have control by applying these basic principles: 1) spend less than you earn; 2) maintain an emergency fund to cover unexpected expenses or changes (e.g. job loss); and 3) minimize debt. Finally, make sure your investments are positioned correctly according to your goals, time frame and risk tolerance.