Friday, November 7, 2014

Q And A - Election Results: What Should We Expect?


Q: I have a lot of friends talking about making serious financial decisions based on the results of this week's election. Is there anything I should worry about? Do I need to change where my money goes?

A: On November 4th, the country elected a Republican majority to the Senate, expanded Republican control of the House of Representatives and chose a majority of Republican governors. Like all elections, this one is significant because it was an expression of the will of the people -- but whether the election outcome can break the logjam in Washington remains to be seen. That said, let's look at three areas where there could be implications based upon current public debate and the election results:

1.) Energy policy

One of the core priorities of the new Republican majority will likely be a move toward energy independence. Several candidates ran on platforms that included increases in domestic oil production. Domestic oil exploration is an issue that members of both parties have supported and may likely reach consensus on forming legislation. It's expected that some increased subsidy, fast tracked permit process, or deregulation of fracking will pass the new Congress. Several Republican candidates also campaigned on lifting the ban on exporting US-produced oil and natural gas, and several others championed the Keystone XL pipeline. Both of these projects will make it profitable to dig fossil fuels from deeper underground.

If you live in an area that may have natural gas, this is great news for your property values. Gas and oil companies will pay big money for the mineral rights under your home. While there have been some concerns about leaking and subsidence, fracking technology has improved dramatically. The increased incentives to drill will make selling your home that much easier.

If you don't live in such an area, you can still take advantage of the wealth of natural resources our country has to offer. Domestic oil production will lead to somewhat decreased prices at the gas pump, but it's more likely you'll see the savings in your gas and electric bill. Cheaper access to coal and natural gas will drive down the costs of heating and generating electricity. It's not likely to come soon enough to help with this heating season, but it might be a little less painful to run the AC next summer.

2.) Market responses

In the aftermath of the election, stocks did appear to be improving. Some of this valuation may be a response to expectations of a business-friendly Washington. More likely, though, this is the market responding to more predictable conditions. The election was credible and peaceful without widespread reports of fraud or intimidation. This is a signal to the market that things are likely to continue as normal and business as usual.

Some experts have suggested that Republican lawmakers will roll out a pro-business agenda. This regulatory climate will encourage stock growth. This is far from a sure thing, though.. Democrats still control enough of the Senate to filibuster any sweeping change and President Obama still has to sign legislation for it to become law -- unless enough lawmakers band together to override a presidential veto. Legislative priorities, therefore, may lean toward less divisive topics, like eliminating the medical device excise tax.

There is a correlation between Republican control of Congress and defense contractor stock prices. Minor increases in value are possible there. On the whole, a more cautious approach is prudent. Wait and see what the new Congress does before overreacting to non-market events.

3.) Tax planning

Tax reform is likely to be considered by the new Republican Congress. Many candidates won elections on anti-tax platforms at both the state and federal levels. This is one instance where it might make sense to make plans based upon the results of an election.

If you're considering making a move that would expose you to significant tax liability, it might be a good idea to wait until January 1. Affected moves might include making an early withdrawal from an IRA or selling a significant quantity of stock. Income tax rates are not that high now, but they're not going to get higher with a Republican House and Senate. Waiting two months won't cost you anything and it might produce a significant tax savings.

There's no guarantee that you'll pay less in taxes next year, but there's the possibility you might. When the risk is negligible and the possible rewards could be significant, it's a good idea to take a wait-and-see approach. Consider holding on to your stocks or putting off tapping into your IRA just a little longer. It may pay dividends.

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