Early October business headlines noted that America’s jobless rate hit a 50-year low, easing fears of an economic slowdown. But Mr. Market, along with Main Street investors, will continue to worry about crosscurrents such as political infighting, impeachment wrangling, and tariff wars. From an investment planning standpoint, the real key to political success in battles over ideas, as Joe Biden once famously pointed out, is “a three-letter word, J-O-B-S.” This factoid is amplified by Bill Clinton’s campaign strategist James Carville who uttered, “It’s the economy, stupid,” while stressing to campaign workers top messages to focus on in the successful 1992 contest against president George H. W. Bush.
Pundits continue to try to explain the political divide between left and right, the coasts versus “fly over country,” globalists versus Walmart shoppers, etc. Perhaps it’s as simple as J-O-B-S. Look around the world. Threaten people’s livelihoods and at the extreme, demonstrations and riots break out, as Mr. Macron found out with the “yellow vest protests” in France. In the quest to battle climate change, a “green tax hike” was imposed on motor fuels. People from rural areas who drove long distances and farmers were the first to protest. The movement spread to members of the working and middle classes frustrated with eroding standards of living. They were angry because they had too much income to qualify for welfare benefits but not enough to make ends meet. We see the same job and income anxieties expressed by Brexit protesters in Great Britain.
How does ground level reality play into investment strategies as the battle for the hearts and minds of voters plays out? How might some of the proposals for change impact job prospects and portfolio values?
Fidelity Investments reported that in the 401(k) plans it administers, savers with at least $1 million in their account recently hit record levels, as did the employee savings rate. For those diligently saving for retirement security, when you threaten them with higher taxes on withdrawal, or propose policies likely to tank stock values, how’s that likely to resonate across the fruited plain? Consider that with $1 million in value, at a 15% to 20% ordinary income tax rate, only $800,000 to $850,000 is yours in terms of future purchasing power. The rest is Uncle Sam’s.
Eight hundred fifty thousand is still a good bit of money but let’s start with $1,000,000 in your 401(K) or IRA. You are retired and to be conservative you withdraw only 5% of your $1 million per year, or $50,000. You are taxed at 15% so you have $42,500 left to run your life, or $3,541 per month. How are you doing? Living large?
If taxed at higher brackets, you have even less. Plus, with inflation your money buys less and less over time. If you dial back on allocations to potential growth assets such as stocks out of fear of volatility, you are confronted with low yields that approach zero adjusted for inflation and taxation. Add worries about longevity and not being a burden on your spouse and/or children, and you can see why comprehensive planning is important, why asset allocation decisions, tax planning, health care decisions, life transitions planning, are critical to mind easing success. Some politicians don’t get it, proclaiming that “only the wealthy own stocks” so attacks on business and wealth formation do not matter to the middle class. Au contraire madame et monsieur! There are plenty of Tom Stanley style “millionaires next door,” hard working and self-made savers, professionals, and closely-held business owners, who disagree.
It’s fine for well-meaning activists, college students, and politicians to proclaim that we all should be vegans as we ban fossil fuels and air travel, while raising taxes to pay for “free stuff,” imposing stiff regulations on business and capital formation in the name of “fairness and income redistribution.” But do not discount the clout and voting power of millions of investors saving for their own financial independence and retirement security, truck drivers, airline workers, workers in the energy sector and allied industries, and all who will be impacted in their myriad bread winning pursuits. They and their spouses are sitting around kitchen breakfast tables preparing for work and daily responsibilities thinking, “They are threatening my job, my family’s security.” The reaction is likely to be akin to that of celebrated 15-year-old Swedish climate activist Greta Thunberg, “How dare you!”
Decision 2020 is likely to boil down to Jim Carville’s truism, it’s the economy…and jobs. Nothing stupid about that. Just human nature and matters of personal financial security.
By Lewis J. Walker, CFP®