J.P. Morgan Wealth Management hosted a recent webcast on the potential investment implications for you and your business around the 2024 election cycle and through year-end. The event was hosted by Rob Ferrari, Head of Solutions and Advice, in conversation with Elyse Ausenbaugh, Head of Investment Strategy, and Adam Frank, Head of Wealth Planning and Advice.

With so many things up in the air and hinging on the outcome of the democratic process, it’s only natural to be wondering about the possible upshot for your finances. Let’s look at some of the key takeaways.

Key macro and market developments

To begin, Ausenbaugh noted that investors have enjoyed strong returns over the past year, with stocks up around 30% and core bonds up in the high-single digits, likely translating to solid gains for well-diversified portfolios.

Despite the market rally persisting over the summer, underpinned by inflation cooling and economic growth remaining resilient, the gains have come with some volatility. This may have some investors wondering where we’re headed.

Signs of weakening in the labor market have been central to the emerging questions about economic sustainability. Ausenbaugh pointed out that the recent uptick in unemployment rates has been driven not by layoffs but by an increase in the size of the labor force and a slowdown in the pace of hiring. Given strong corporate earnings growth and a recovery in corporate profit margins, Ausenbaugh said there is little evidence to suggest that businesses are preparing for large-scale layoffs.

“So taking those dynamics together – the slowdown in the labor market met with the signs that otherwise the economy, businesses and consumers are actually fairing okay,” Ausenbaugh explained, “investors are reassessing how to rebalance exposures in portfolios.”

Monetary policy impacts

Beyond the evolving landscape of the election, we are also facing a period of transition when it comes to interest rate policy. After holding the benchmark interest rate at the restrictive level of 5.5% since July 2023, Fed officials have made it clear that the time has come for policy to adjust and that the central bank does not welcome any further weakening in the labor market.

Much of the debate has centered around whether inflation could return to palatable levels without a recession – in other words, whether a “soft landing” is possible.

“Based on the data that we have in hand,” Ausenbaugh said, “I would argue that the wheels are already touching down and that so far the landing actually looks pretty smooth.”

Portfolio implications

According to Ausenbaugh, the Fed’s willingness to cut rates and shift its bias toward staving off weakness should bode well for businesses and households, provided inflation continues to behave as expected.

“[We’re] encouraging investors to kind of find a prudent balance between managing risks and also seizing opportunity,” Ausenbaugh said.

Since cash tends to underperform during rate-cutting cycles, it could be a good time to look at your cash position. If you decide to reallocate a portion of your cash holdings, high-quality, short-duration bonds can help you lock in today’s yields for longer, or you may opt to extend even further with longer-duration bonds. Municipal bonds could also be a good option for your personal portfolio, since they lock in yields but also offer tax advantages and tap into defensive characteristics to help offset volatility.

It also might be a good time to consider building or adding exposure to stocks, with trend-like returns in the mid- to high-single digits expected ahead.

To boot, Frank mentioned that as we enter the falling-rate environment soon, we should keep in mind that rates are higher today than they will be six months down the road. For now, strategies that harness these temporarily higher rates could be worthwhile. “Things like a charitable remainder trust, for example,” Frank said.

Potential election outcomes

When it comes to the U.S. political outlook, it is not only occupancy of the White House that remains to be determined – the balance of power between the houses of Congress and the presidency also affect which policy proposals are likely to be enacted.

While we don’t have a crystal ball to forecast with accuracy which direction policies may move, when we think of the landscape of things being proposed, the one that is most top of mind for investors right now is probably potential tax changes.

“The results of the election could also impact capital gains rates,” Frank said. “But it would require an act of Congress.”

Even before we know what’s on the table in terms of tax policy, there are things that investors can do today to capture some control and optimize their financial situation to navigate potential changes. That could mean using a tax loss harvesting strategy, investing in municipal bonds rather than fully taxable corporate bonds or simply talking with an advisor about which types of assets you might hold in specific types of accounts to optimize tax treatment.

Wealth transfer and business succession issues

The pending expiration of the 2017 tax law would also have a significant impact when it comes to the gift tax exemption. Without legislative action, the lifetime exemption amount that you can pass on without triggering the gift tax will also revert to prior levels – meaning the limit will roughly be cut in half at the beginning of 2026.

If you are concerned about the impact of gift or inheritance taxes on the legacy you will leave for your family, you may be interested in taking advantage of the more generous exemption amounts before they sunset. However, Frank suggested that the optimal strategy for this depends on the types of assets you own as well as your family situation – making this a good topic to review with your financial advisor.

With an eye toward the potential changes to the rules governing intergenerational wealth transfer as they could affect business owners, Frank zeroed in on the importance of business succession planning. In this respect, having a plan is key. “The sooner you begin to think about what your plan is, what you want to do, the more flexibility you'll have and the more likely it is that a succession plan or a transition plan will be successful,” Frank said. Determining the optimal way to exit your business – whether that’s passing control to your family or selling your company to your employees or a third party – requires long-term planning, regardless of the latest political or tax-policy developments.

For Frank, another key element of any successful business transition is communication. This means actively involving the family in open discussions about wealth, the purposes for it and the values that underpin it.

Furthermore, Frank believes successful generational planning requires a flexible approach. “We don't know what the estate tax, income tax, anything… We don't know what it's going to be in two months – let alone in 10 years or 20 years or 50 years. Keeping flexibility and having a plan that allows for flexibility is, I think, critical to dealing with unexpected changes,” he said.

Bottom line

As we stand on the precipice of a Fed rate-cutting cycle and an uncertain election, investors are likely wondering how to optimize their portfolio positions over the next year. While it’s impossible to predict exactly what the future will hold, one thing you can do is consider your cash position – assessing whether you're holding onto enough or perhaps too much. If the answer is too much, it’s worth thinking through what makes sense in terms of deploying it into markets.

Of course, it’s healthy to remain flexible and anticipate possible impacts of political developments on your finances. But it’s also important not to lose sight of the big picture. “Keeping your long-term goals in mind can help put a lot of the short-term fluctuation in markets in perspective,” Frank said.

As we head into the unknown, it might be worth speaking with a financial specialist or advisor who can assist you in building or adjusting a plan that meets the needs of your personal and business wealth.