Barring partisan gridlock and budget-driven shutdowns — let’s look for compromise in 2015 and beyond — the 114th U.S. Congress is poised to introduce dynamic changes to the legislative landscape. And investors ought to take notice.
Eight years ago was the last time the GOP controlled both the House and Senate, and the moment for dramatic revisions to recent legislation and executive measures may well be at hand.
Let’s look at six key GOP legislative goals and initiatives, and how those stand to affect investments — from boosting key industry sectors, to corporate tax rates and their potential impacts on bonds, to how we plan and invest for retirement.
- Tax Rates: The Republican Congress is set to tackle the issue of corporate tax rates, with the argument being that many corporations in the U.S. face rates significantly higher (35%) than those in other countries. If reform does come down the pike over the next two years, the GOP could lay the groundwork for new mergers and increased profits that drive up the value of stocks and other assets for investors. On the other hand, if tax rates come down for corporations, the kinds of municipal bonds that currently make up these companies’ portfolios could look less attractive as their tax bills shrink. If corporations begin to sell off their munis, that would decrease the value of the bonds for most holders.
- Defense Investments: The 114th Congress’ anticipated spending on items such as new Navy shipbuilding, military personnel, ops and maintenance is already expected to increase by at least 30%, according to the Congressional Budget Office, in 2014. As such, investors could do well to look at assets in the realm of defense-related research and development, manufacturing and services.
- Natural Resources: In general, Republican control of Congress is considered a favorable circumstance for natural-energy producers — and perhaps a cooling agent when it comes to the alternative-power sector. One case in point, if approval and construction of the Keystone pipeline is an early GOP success story, then stocks surrounding energy producers as well as oil and natural-gas shipping could see a lift.
- Medical-Device Manufacturing: When President Obama’s Affordable Care Act became law, it created a new excise tax for the medical-device industry. If the Republican controlled Congress manages to dismantle the ACA, that tax would potentially disappear, giving the sector an investor-friendly boost.
- Retirement Impacts: In a move that would affect the way federal employees plan and invest for retirement, federal benefits are likely to receive Republican attention during the term of the 114th Congress. Forecasts of changes to come began as early as April 2014 when Republicans in the House proposed a budget that would’ve hiked federal workers’ defined benefit plan contributions to as much as 6.35% (up from 0.8% – 4.4% depending on plans and dates of hire). Under that plan as well, Civil Service Retirement System contributions would’ve increased to 12% from 7%. While that budget didn’t make it through the Senate, last year, with both parts of Congress now home to GOP majorities, something similar may well return to the budget this year with a greater chance of success.
- Social Security: A factor for all retirement-planning investors to watch, certainly in terms of how much they allocate and where, first-day changes to how the 114th Congress does its accounting is bound to put Social Security benefits under the lens over the next two years. Computations that used to allow the system to cover certain shortfalls will almost certainly not be allowed under the new math, and that means as much as a 20% cut to payments could appear in some Social Security checks.
You don’t have to take a political stance to see the writing on the wall. These changes could affect your portfolio and financial planning. But remember, every investor still has time to prepare for, and take advantage of, the way things tend to move in at the federal legislative level — that is, slowly and deliberately.
So, set your strategies, and go through the next two years prepared to change your investments to match the lawmaking changes to come.
James O’Brien wrote 6 Ways a Republican Congress Could Affect Your Portfolio.
