Reed C. Fraasa, CFP®, AIF®, RLP®
As an investment advisory firm, we want you to understand the facts and make decisions in your best interest. Far too often, we see people make short-term decisions based on a perception of something rather than a prudent judgment based on facts. This is often the case after national elections.
However, politics alone has little impact on your portfolio.
The Stock Market
The stock market and bond market will respond to both macro and micro information or data. Macro data involves governments and countries like inflation, employment information, exports and imports, consumer spending, geopolitics like wars and trade deals, etc. Microdata involves individuals and companies that can affect sales, earnings, and profits, including competition, marketing, employment, legislation, regulations, etc.
Monetary Policy
Congress controls our country's monetary policy (taxes and spending), which is macro-economic data. Whether you are a democrat or republican, you want your elected officials to act responsibly and prudent with the nation's resources. The following legislative process defines how a tax bill turns into law:
Tax bills begin in the House of Representatives and are referred to the Ways and Means Committee. When this committee reaches agreement about the legislation, they write the proposed tax law.
The bill goes to the full House, debated, possibly amended, and eventually approved.
The bill goes to the Senate, where it is reviewed and often rewritten by the Finance Committee. The committee's version is then presented to the full Senate.
After the Senate approves the bill, a joint committee of House and Senate members arrives at a compromise version.
The compromise version of the bill is sent to both branches for approval.
After Congress passes the bill, it goes to the president, who can either sign it into law or veto it.
If the president vetoes the bill, Congress may try to override the veto with a two-thirds vote of each House. If this vote succeeds, the bill becomes law without the president's signature.
Sounds simple, but in the past, that is typically not what happens. Built into the legislative process is something called a filibuster - an option for a senator to object to a piece of legislation and hold up the proceedings for an indefinite period.
A filibuster is not a bad thing. It came into being in 1806 and ideally enables a minority party to force a compromise with a majority party by objecting to a piece of legislation. However, the filibuster became problematic during World War I, and Congress passed a new rule permitting cloture.
Cloture is a rule that allows, with a supermajority vote, an end to debate and filibuster. Over the years, and several Senate rules later, this has come to be known as the Byrd Rule, after Senator Robert Byrd. With a few limited exceptions, it takes 60 votes in the Senate to end a filibuster for all legislation. One exception is for a type of spending or tax bill known as a reconciliation bill.
Reconcilliation Bill
Since the late 1970s, except for the Tax Reform Act of 1986 (74 Senators voted yes), all other tax and spending acts (21 in all) resulted from reconciliation. You will typically see the word reconciliation or omnibus in the title of the bill. Both parties use reconciliation now to legislate monetary policy. So, what is different about a reconciliation bill?
Each year, the president sends a budget to Congress. That starts the congressional legislative budget process in each House of Congress. Reconciliation limits debate to 24 hours and eliminate any filibuster for spending and tax bills if they are part of the annual budget process.
The Senate is limited to three reconciliation bills per year, one each for spending, tax, and debt ceilings, and it requires a simple majority to pass. There are six conditions whereby a bill is not eligible for reconciliation and must achieve 60 votes in the Senate.
Of the six conditions, the one that applies to this discussion is that if any part of the legislation increases the deficit in any year (typically ten years), the provision must either be amended or sunset by the time it creates said deficit.
Think about that for a moment.
The tradeoff for using reconciliation budget bills to pass spending and tax bills is that they will always have a finite life. By their very definition, they can never be so extreme as to change the country's path significantly.
In 2001 and 2003, George W. Bush was president during the two reconciliation bills that cut taxes and spending. In 2010, Barack Obama was president during the reconciliation bill that enacted the affordable care act and raised taxes.
If you look at economic growth following both of those reconciliation bills, overall, the economy and markets grew over time.
In 2017, Donald Trump was president during the reconciliation bill that cut taxes. The passage of these bills only made small differences in otherwise growing economies.
Author’s Bio
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.