By Haddon Libby
As we approach the end stretch of the 2024 Presidential election, we are told that the wrong choice will be the end of capitalism, start of a dictatorial regime or the beginning of the End of Days.
None of these are true.
Using history as our guide, the six months before and after a Presidential election is typically positive for the stock market and most of the economy. At present, unemployment is strong with a 4% unemployment rate while stock markets are reaching all-time highs. Despite this, a large portion of Americans feel the economy is not working for them as costs rise faster than income.
When we think about the longer-term impacts of bad governance or an economic crisis, we are already on the path to large systemic financial problems. For the most recent fiscal year ending June 30th, the US government collected $4.9 trillion in revenues and spent $6.8 trillion. This deficit funding was financed. At present, the US government has $35 trillion in debt outstanding. Nearly $1 trillion is spent annually servicing the debt.
Entitlements represent 60% of government expenses annually. Entitlements are mandatory payments like Social Security, Medicare and Medicaid. This means that entitlements and interest costs use all government receipts. Anything else that the government spends money on must be financed.
All other spending is referred to as Discretionary Spending and totals $2 trillion annually. Nearly half of this is spent on defense. Most of the rest goes toward education and transportation. The cost of the 2 million employees of the US government is roughly $200 billion per year.
As it is highly unlikely that politicians will cut Entitlements, we must look at Education where $1.2 trillion is spent each year. Given that politicians want to increase security at schools, it is unlikely that we can cut this item in any meaningful way.
With bad actor countries like Iran, Russia and China, how much can be cut from the $841 billion defense budget?
As you can see, there is no way to close a budget deficit of $1.8 trillion without tax increases.
Income taxes represent 54% of government revenues. Social Security and Medicare are funded by payroll taxes that account for nearly one-third of revenues. Corporations pay taxes and fees that represent nearly 10% of revenues with custom taxes/tariffs, estate taxes and the leasing of US land representing less than 5% of revenues.
Both candidates have plans that add to deficits. In the upside-down world of US politics in 2024, the Democrats are more fiscally responsible than the Republicans. Higher tariffs as proposed by Republicans would reignite inflation while causing a recession while tax cuts for the wealthiest would worsen an already unsustainably high budget deficit.
As it relates to your 401k account or stock holdings, the chart shows the performance of the S&P 500 stock market index over the last 100 years. It is hard to imagine a harder time for the country than the Great Depression, World War II or COVID shutdowns. As you can see, stock values move higher over time.
No matter who becomes our next President of the United States, the biggest problems that will impact the lives of our children and their children are not being addressed. The debt problem comes from our inability to work together to tackle key problems that will impact the lives of future generations.
As examples, we spend a lot on education but get increasingly poor results relative to other developed countries. Our healthcare system is the most expensive yet results from that spending are below that of many other developed countries.
As it relates to your money, the 100-year bias is for stock markets to adjust, recover and ultimately produce higher valuations for investors no matter who is in charge or what happens.
Haddon Libby is the Founder and Chief Investment Officer of Winslow Drake Investment Management, a RIA firm that performs to the Fiduciary standard of care with clients. For more information on our services, please visit www.WinslowDrake.com.
