Now That the Election’s All Over

By David Chazin

It’s been roughly one month since Barack Obama was re-elected as the President of the United States and the Republican party maintained its majority in Congress. In that time, many of my Chevron clients have asked how these two outcomes will affect the financial landscape, and just as importantly, how they might personally be affected.

A History Lesson

For starters, given how much of the election ads centered on fixing the economy, some Chevron employees might surmise that the political party of the presidency and / Congress makes a marked difference in stock market performance. But even looking back to the early 1900’s does not reveal any clear trends (see the chart below).

Overall, business activity (reflected by the Dow) in the United States has done quite well under both Democratic and Republican administrations, with occasional crashes under the watch of both parties. If you want to look back another 100 years, business grew under Federalist, Anti-Federalist and Whig administrations. The performance of the stock market is more defined by innovation and the wise use of capital than politics.

The Tax Outlook

There has been a great deal of speculation over what will happen with income tax rates, which are scheduled to increase significantly (particularly for high earners, such as Chevron employees PSG 26 or higher) once the Bush era tax cuts expire on December 31.

It’s hard to say exactly where tax rates will end up, as Democrats have been pushing for tax increases for the wealthy, and Republicans are only somewhat acknowledging that tax increases may be necessary. At the same time, everyone is loath to allow taxes to return to the levels they were at in the 1940’s, when top-earning Chevron (Standard Oil Company of California) executives would have paid a 94% marginal tax rate. Interestingly, the top federal marginal tax rate (inflation-adjusted) was as low as 1% in 1913, as you can see from the following chart.

When comparing the tax rates against the Dow long range trends over the past 100 years, you realize that tax rates do not appear to have a strong correlation to investment performance. Tax rates were high (though they dropped) during the “Roaring 20’s,” only to rise again during the second half of the Great Depression. Tax rates have been low since the 1980’s, but that included periods of incredible growth coupled with periods of economic downturn.

One thing to be concerned about is that long-term capital gains tax rates are also scheduled to increase significantly if nothing changes. Noted investor Warren Buffett has declared that he is waiting for Congressional action before selling any of his stock, and considering how much more capital gains taxes he is subject to compared to a typical Chevron employee, you probably don’t need to panic yet.

One item worth mentioning is that if capital gains taxes increase significantly, the potential benefits of using an NUA (net unrealized appreciation) strategy on your ESIP when you retire will be reduced. By using NUA, you can pay capital gains taxes instead of income taxes on the growth of your Chevron stock in your ESIP, which could yield a major tax savings.  However, this is a complex strategy dependent on many variables that has to be balanced with proper diversification (i.e. not holding 100% Chevron stock), which is where a financial planner can help.

The “Fiscal Cliff”

The “Fiscal Cliff” might be THE term of 2012, but perhaps it wouldn’t sound quite so ominous if we simply called it “budget indecision.” A political stalemate in 2011 resulted in a series of laws that, if not changed, will result in both spending cuts and tax increases occurring simultaneously. The problem is that these changes are both abrupt and bluntly applied, and as a result, the Congressional Budget Office has predicted an increased risk of recession (from which even Chevron employees will not be immune).

So far, each side has signaled willingness to compromise in order to avoid the “Fiscal Cliff.” Of course, as we have seen, sometimes politicians can be subject to posturing and brinkmanship rather than constructive action, which is why important decisions like this have been put off for so long. Hopefully, with the passing of the election, both parties will prove willing to find a common ground for the good of this country.

Your Personal Investments

These are many factors to consider, and it may seem daunting. One piece of good news is that we try to design portfolios in advance of risk rather than in response to risk. Our clients’ portfolios were designed not for the election or the subsequent two months of fiscal drama; instead, we built them first and foremost to help you achieve your goals over the long-term.

There are still a lot of unknowns, but we are keeping a close eye on things so we can help our clients make the best decisions with their personal investments and overall financial planning. We will continue to keep everyone informed and will review your accounts on an ongoing basis.

I’d be happy to sit down with any Chevron employee (or friends or family of yours) to review how well they’re financially positioned moving forward, and if needed, help you make the changes that may make the difference between retiring comfortably and barely scraping by. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.

Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website at www.insight2wealth.com.

CRN201211-2074756