2012 elections report

7/28/2019 2012 Elections Report

1/16

The elections

Whats at stake for the economy and your wallet

September 2012

As we approach

decision day, here are

some key election-year

issues to ollow as

they relate to your

personal fnances.


2/16

OVERVIEW

OOKING BACK 3we get closer to the Novemberctions, it is important to put themperspective and remember what really

ould drive your investment decisions.

DDRESSING TAXES 12number o tax provisions are set topire at year-end and, i not addressed,uld result in signifcant tax increases.

ACING DEBT 7e elections will help decide the direction

government policy toward borrowingd spending and potentially impactery Americans pocketbook.

The elections, and uncertainty, are coming

Perhaps even more than bad news, uncertainty conounds the

markets. Although bad news is, well, bad, its a known quantity,

so the markets have a good idea o what theyre dealing with.

With uncertainty, the outcome could be good news, bad news

or no news. The markets fnd that unsettling.

ABLE OF CONTENTS

Like it or not, the markets are going to have

to deal with uncertainty between now and

Election Day. History suggests that the simple

act that this is an election year, with the usual

concerns about who will control Congress

and the presidency, could aect whether

stocks end the year up or down. In addition,

this year theres the prospect o the country

heading o what many are calling a fscal

cli early in 2013.

Although its impossible to know whats

going to happen on November 6, its

important or investors to understand all

the issues at stake. In this report, we look at

the major concerns and oer perspectives

rom Wells Fargo Advisors economic and

market experts. Armed with this inormation,

you can work with a Financial Advisor rom

Wells Fargo Advisors to help determine what,

i any, adjustments you need to make to your

portolio to prepare or the uncertainty that

lies ahead.


3/16

History can be an excellent teacher, but its not 100% reliable. That being

said, we can look back at the markets past perormance or clues to what

this election year may hold.

Looking back


4/16

With so many decisions to be made regarding

government policy toward taxes, spending

and services, gauging the potential eects o

the election on the markets is an exercise in

predicting the unpredictable. Although every

election year is dierent, one thing to consideris how the stock market has perormed

historically around presidential elections.

Since 1924, the market has had positive

returns in 17 o the previous 22 election years.

Although this year has provided above-

average returns so ar, a look back suggests

that the market usually oers below-average

returns in election years. While this can

provide some context to market trends, a more

useul approach is to tune out the election

noise and any short-term market gyrations

and stay ocused on your long-terminvestment strategy.

What to look for in the markets

Source: Haver/Wells Fargo AdvisorsAs of August 15, 2012

Past performance is not an indication of future results. An index is not managed and is unavailable for direct investment; does not include taxes or reinvestment of dividends.

The S&P 500 index is a composite of the largest 500 publicly traded companies in the United States.

A vote for taking the long view

Growth of S&P Index, -. Over the past years, Republicans and Democratshave each served terms in the White House. While no one can predict what will takeplace in the short term of a presidents tenure and how that may affect the economyand markets the long-term movement of the market has been upward.

1,600

1,200

400

200

100

50

25

800

I Republican in White HouseI Democrat in White HouseGElection year returns (in percent)

Hoover

Coolidge

Kennedy

Johnson

Nixon

Reagan

Bush

Bush

Obama

Clinton

Truman

Roosevelt

Eisenhower

Carter

-40.720.912.118.013.2-3.81.114.1-14.930.8-19.2 11.0-6.814.80.123.818.511.72.411.232.618.8

Many investors are interested to know what impactthe presidential election could have on the markets.

LOOKING BACK


5/16

LOOKING BACK

As shown in the charts below, historically the third year of a presidents term, measured by the performance of the S&P , has been the

strongest for stocks and has most often provided positive returns. The first two years of a presidents term show lower growth and have

a higher percentage of negative returns. A possible explanation is that incumbents look to generate favorable economic growth during

the last two years of their term, just before new elections.

Markets often perform better in the last two years of a presidents term

S&P Index, - (as of August , )

Average return by presidents year in oce Percentage of years with positive marketreturn by presidents year in oce

Election year returnsSince , the stock markets annual returnin election years has underperformed itsaverage for all years. In , the S&P experienced a significant decline. However,so far this year, the return is above thehistorical average for all years.

1As of August 15, 2012.Source: Haver/Wells Fargo Advisors

-

ELECTIONLAST

ALL YEARSAVERAGE

DATEYEAR-TO-

YEARAVERAGE ELECTION

FIRST YEAR

Post-election

SECOND YEARMid-term

FOURTH YEARElection

FIRST YEAR

SECOND YEAR

THIRD YEAR

FOURTH YEAR

THIRD YEARPre-election

Historical data show that an election year does not have a significant impact on the stock market.

Looking at presidential election cycles, the market is more likely to have a positive return in thelast two years of a presidents term compared to the first two years.

Trying to predict how the market will respond to election outcomes is dicult and possiblycounterproductive. Maintaining an appropriate mix of investments tailored to your financialgoals is a better long-term strategy.


6/16

What drives the market morethese days, political eventsor economic fundamentals?

Overall, investors shouldconcentrate on long-termfundamentals and valuationsas opposed to near-term eventsor uncertainties.

In the short term, a litany ofconcerns the European recession,slowing growth in China, slowgrowth in the United States,international and U.S. debt levels,consumer debt levels, the fiscal cli,the continuation of the Bush taxcuts, worries with respect togeopolitical problems in the Middle

East, and the uncertainty and noisesurrounding the elections have kept consumer and investorangst at high levels.

As a result, we are likely toexperience more volatility asthe markets move through these

uncertainties. However, as someof these uncertainties become partof the past, investor sentiment islikely to lift modestly.

What impact will the upcomingelections have on the stockmarket and does this aect yourlong-term outlook?

While the upcoming elections arelikely to result in volatility for thenext few months, they do not change

our expectation that stocks shouldshow better return potential thanfixed-income vehicles over time.

How has the market reacted tothe economic uncertainty wehave seen here and overseas?

The equity markets have continuedto be volatile in this midcycle periodduring which growth has slowed.It is not unusual to experience flatequity market performance after the

first run-up following a recession.The S&P is at a similar placetoday as it was in April .However, we believe that early signsof bottoming in Europe and signsof a moderation in the slowdown inChina are likely to have favorableimpact upon investor sentiment

and the valuation of the S&P over the next year.

What do you expect from themarkets for the remainder ofthe year?

Our year-end target range forthe S&P Index is ,-,.Should new Fed and European

Union quantitative easing programsmaterialize, we believe the S&P could move toward the top of the

range prior to year-end. However,the third quarter of the calendar yeartends to be the weakest performingquarter for equities in the post-WorldWar II period. Thus, an expectationon the part of investors for

additional monetary stimulus iscurrently osetting a slow economyand some negative seasonaltendency for the equity markets.

Should additional easing notmaterialize, the markets could revertto a lower level over the next couple

of months, before moving towardour year-end target range.

Where do you see the bestopportunities in this market?

We believe that the bestopportunities in a second up-legfor the market lie in the morecyclically-sensitive issues thathave underperformed during thecourse of the last year. We currentlyrecommend an overweightallocation in the Technology,Consumer Discretionary, Materials

and Telecom Services sectors ofthe market.

Stuart T. Freeman, CFA, Chief Equity Strategist for Wells Fargo Advisors

Outlook positive despiteuncertainties

LOOKING BACK


7/16

What was once a non-event, raising the debt-ceiling limit has become a

hot issue. With the approaching need to increase it again, investors need

to watch the debate closely.

Facing debt


8/16

FACINGDEBT

Dealing with the nations debt

Debt ceiling limit

Debt subject to limit

$18 trillion

$14

$12

$10

$8

Federal debt approaches debt ceiling

The nation s outstanding debt is on track to bumpagainst the current debt ceiling limit later this year.

1Source: U.S. Treasury - as of Aug. 15, 201 2.

LIMIT

DEBT-CEILING

TRILLIONDEBT

OUTSTANDING

TRILLION

$16

Many analysts agree that the United States is

once again on the verge o bumping into its

debt ceiling limit. The last time this happened

back in the summer o 2011, the ensuing

debate in Congress over raising the limit was

so bitter that S&P responded by downgradingthe U.S. debt or the frst time in history. In the

end, the ceiling was raised, but the impact

o the legislation that allowed it to happen

is yet to be ully realized.

Its easier to understand what the debt ceiling

limit is than to grasp what could happen i

Congress ails to increase it when necessary.

The ceiling is just what the name suggests

a cap on how much outstanding debt the

country is allowed to take on. I the ceiling is

hit, the government will be unable to borrow

any more to pay its bills.

Since the government has always been

able to borrow the additional unds it needs,

no one knows or sure what will happen i

that ability is taken away. It could mean that

parts o the government will be shut down.

Theres the possibility that the Treasury could

ail to make interest payments or repay

principal on maturing debt. Even a partial

deault could put the nations status as a

perceived risk-ree investment urther in

jeopardy. I investors perceive U.S. debt as

being more risky, the Treasurys cost o

borrowing may increase, which could urther

uel the nations escalating defcit problems.

Congress will debate whether to increase theamount o debt the country can accumulate.


9/16

FACINGDEBT

While the federal governments fiscal challenges get a lot of attention, less discussed are the individual states financial woes.

However, as a lingering result of the last recession, more than half the states face projected shortfalls for some more so than

others, as shown in the map below. To get their houses in order, these states are likely to increase taxes, cut spending or both, which

could negatively impact employment and the overall economy. As a result, what happens closer to home in the nations state capitals,

along with what goes on in Washington, could help determine the economic recoverys future.

Washington is only part of the story

WA

OR

CA

AK

HI

RI

AZ

UT

CO

NM

TX

OK

KS

NE

SD

NDMT

WY

ID

IA

MO

ILIN

KY

OH

MI

WV

TN

FL

GA

SC

NC

VA

PANJ

DE

MD

NY

VT

NH

MA

CT

ME

ALMS

LA

MN

WI

AR

NV

Some states are in better shape than othersProjected fiscal year shortfalls

Data: Center on Budget and Policy Priorities

Nevada .%

Oregon .%

Texas .%

Greater than of budget

New Hampshire .%

Washington .%

California .%

Connecticut .%

Maine .%

Louisiana .%

North Carolina .%

Minnesota .%

Ohio .%

Wisconsin .%

Missouri .%

Between and of budget

Nebraska .%

Hawaii .%

Maryland .%

Illinois .%

Florida .%

Alabama .%

Kentucky .%

Vermont .%

Massachusetts .%

New York .%

Colorado .%

Pennsylvania .%

Georgia .%

New Jersey .%

Virginia .%

Between and of budget

I States n ot proj ecting a shor tfall.I Mississippiis facing a shortfall, but its magnitude has not been reported.


10/16

FACINGDEBT

Failure to increase the debt ceiling limit could lead to the United States first default.

Because U.S. Treasuries are a perceived safe-haven investment, a default, although unlikely,could dramatically impact world financial markets.

Talk with your Financial Advisor about what adjustments you may want to make to helpprotect your investments.

Spending cuts are looming

MEDICARE

Mandatory spending cuts (in billions)

Mandatory cuts to the federal budget are set to take place from to if Congress does not act.

Tax increase on earned income (including netself-employment income) above $,(individual lers) or $, (married/joint lers)Tax imposed on net investment income if modiedadjusted gross income (MAGI) exceeds those samethresholds

Medicare tax changes are in the ong

MAGI is adjusted gross income shown on page of IRS Form plus any foreign income or foreign housing costs that were excluded from income.

INFRASTRUCTURE AND SOCIAL SERVICES DEFENSE MISCELLANEOUS

Data:Congressional Budget Oce
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11/16

How do you think Congress willaddress the debt ceiling debateas it approaches again?

The debt ceiling limit debate willunfold after the November elections.Should a single party control bothhouses of Congress and thepresidency, the debate will likelybe handled without the threat of agovernment shutdown and default.A split in power will be more

problematic. The markets normally

do not respond well to uncertainty,and should this debate once againgo down to the wire, investorconcern will likely increase. Whilethe debate is important and addsuncertainty to the picture, theultimate solution is what mattersthe most to the markets.

Under all scenarios, we believe thelikelihood of an actual default is

extremely low. We do not see eitherparty being willing to jeopardize the

United States reputation by failingto pay interest or repay principalon maturing debt.

How does the United States debtlevel aect the bond market?

The supply of Treasury debt hasexploded in recent years. Normally,a significant increase in supply of

any product would cause a decreasein prices. However, the oppositehas occurred, as bond prices haveincreased significantly, pushingdown interest rates, during thisperiod. This suggests that demand

for Treasury securities has increasedat an even greater rate than supply.The increase has come from the Fedbuying Treasury securities, theEuropean Central Banks discountloan program, strong retail fundflows into fixed income productsand institutional investors lookingto Treasuries as a perceived safehaven during uncertain times.Given the significant U.S. budgetdeficit, we do not expect supply

to decrease in the future, but thefactors driving demand are likelyto diminish, driving interest rateshigher over time.

Could another credit ratingsdowngrade happen, and whatwould that mean?Any agreement to increase thedebt ceiling would again cause therating agencies to evaluate thegovernments credit rating, anddepending on the policy outcome,

could lead to further downgrades. Iflawmakers are unable to agree upona medium- or long-term plan thatbegins to make progress on bothfiscal policies and deficit reduction,we could see negative ratingsactions by sometime next year orearly in . At this point, with noreserve currency alternative, we

expect that even in the event offurther downgrades, investors wouldcontinue to purchase Treasuries asa perceived safe-haven asset.

Whats your outlook for interest

rates?U.S. Treasury securities continueto see strong demand from globalinvestors looking to reduce risk. Itdoes not appear that we will havea quick resolution to the Europeandebt concerns. Given ourexpectations that perceived safe-

haven buying will continue tokeep rates depressed, our -yearTreasury yield target for year-endis . while our -year yield

target is ..With interest rates near historic

low levels and inflation likely toincrease in coming years as theglobal economy strengthens, webelieve that interest rates will trendhigher over time. While we do notexpect a rapid rise in rates overthe next months, investorspurchasing longer-dated bondsface an investment horizon inwhich we will likely face a period

of significantly higher yields, whichwould negatively impact bondprices. It is important that investors

not become complacent; much likeequity prices, interest rates do notmove in a straight line, andsurprises can occur.

FACINGDEBT

Brian Rehling, CFA, Chief Fixed Income Strategist for Wells Fargo Advisors

Let the debt ceiling battlebegin again


12/16

You might expect that Congress would need to vote to raise taxes.

Not this year. Taxes are scheduled to increase ater December 31, 2012,

and its up to Congress to decide whether to stop it.

Addressing taxes


13/16

The expiration of the Bush-era tax cuts a

variety of reforms, many dating back to

thats scheduled to occur at the end of the

year is making taxes a big election-year issue

in . Unless Congress acts, the expiration

will result in tax increases after December in a variety of areas, including income, capital

gains and dividend taxes, that may aect

most taxpayers.

Theres talk in Washington about extending

some, or all, of the cuts, but no one knows

where that will lead. However we do know what

changes will occur if Congress fails to act.

Planning for what could happen

Due to the magnitude of the changes

scheduled to occur at year-end, its more

important than ever to work closely with

your tax advisor and Financial Advisor

early this fall to plan your tax strategy.

Certain taxpayers will particularly want

to consider acting before year-end. That

includes investors who:

u Hold a large position in a single stock

thats appreciated in value. If youre

thinking about selling and diversifying

to help manage your risk, may be

the time to do it if you believe capital gains

tax rates may go up next year.

uHave company-granted stock options

or company-stock benefits. You may

benefit from exercising and/or selling

before the potential income tax increase.

uWant to take advantage of the

,, lifetime gift-tax exemption.

If you want to make gifts to family

members during your lifetime, talk with

your attorney about the pros and cons

of doing it while the exemption is at its

historic high.

The scheduled expiration of the Bush-era tax cutsis making taxes a big election-year issue.

Decision time regarding taxes

If Congress does not act

Income taxesBarring further Congressional action, income tax rateswill increase after December to what they were priorto . The % bracket will disappear, and the ratesfor the remaining brackets will increase. The potentialexpiration of the Bush-era tax cuts has far-rangingtax-planning implications.

For more information ask a Financial Advisor for a copyof our report, Focusing on Upcoming Tax Changes.

TAX RATE

n/a

TAX RATE

ADDRESSINGTAXE
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14/16

ADDRESSINGTAXES

Unless Congress acts, a number of temporary tax provisions will expire at the end of resulting in higher tax bills for most Americans.

As part of the ongoing debate over the countrys budget and deficit, Congress may considerextending certain provisions either by the end of the year or retroactively in or not at all.

Talk with your Financial Advisor and tax advisor to stay up-to-date with any progress on theseissues and whether they may prompt any changes in your investment strategy.

If Congress does not act

Effective rates could be higher for taxpayers subject to the additional Medicare taxes described on page .

Other scheduled changes

Qualified dividend taxes

In , qualified dividends (in general, those paid by a U.S. corporation or an internationalcorporation that trades on a U.S. stock exchange) are taxed at todays more attractive

long-term capital gains tax rates. Those dividends would be taxed at higher ordinaryincome tax rates in if the tax cuts expire.

TAX RATES TAX RATES

&

Estate taxes

For the tax year, $,, can be excluded from a taxable estate; assets above thatamount are taxed at %. The exemption is scheduled to be decreased to only $ million,potentially exposing more estates to the tax, and the top rate will be %.

EXEMPTION EXEMPTION

million

TAX RATE

million

TAX RATES

Child tax credit

Currently, parents of a qualifying child under the age of receive a credit of up to $,on their tax return. Credits reduce a filers income tax bill dollar for dollar. For example, in a $, tax bill would be cut to $, for a family with one child claiming the childtax credit. The credit is scheduled to decrease to $ per child in .

PER CHILD PER CHILD

Long-term capital gains taxes

Taxpayers in the two lowest ordinary income tax brackets have enjoyed a % capital gainsrate in recent years. Under current law, taxpayers in the % ordinary income tax bracket in (there will be no % bracket) will face a % long-term capital gains rate in . Thosein the higher brackets would see their rate increase from % to %.

TAX RATE TAX RATE

tax brackets

tax brackets

tax bracket

tax brackets

Payroll taxes

Although not a Bush-era tax cut, the payroll tax cut worth % of the first $, of aworkers wages that started in is also scheduled to expire December . A personmaking $, has enjoyed roughly $ extra a month, while someone making $,has been taking home an extra $. a month.

SALARY ADDITIONAL TAX


15/16

Between now and year-end,do you think that Congresswill do anything regardingthe expiration of the Bush-eratax cuts?

We do expect to see somethingbefore the end of the year butprobably nothing concrete beforethe election. Both parties havesignaled a willingness to delaythe expiration.

The Republicans would like to

extend the tax cuts for all taxpayersas part of a broader tax reforminitiative. The Democrats wantto extend the tax cuts for mosttaxpayers but not for all, particularlyhigh-income taxpayers.

As we get into the final weeks of thecampaign, fiscal policy and the taxcuts will be an important issue asboth parties try to attract voters.Therefore, we do not expect anyfurther action before the election.

Instead, both parties are likely towait to see who comes out aheadafter the vote.

After both parties see what they

have gained and lost during theelection, we are likely to see moresubstantive measures to addressthe fiscal cli, which comprisesthe tax cuts scheduled expiration

and the significant spendingreductions slated for January.However, the final measures toaddress the expiring tax cuts maynot be enacted until after the newCongress is in session in January.

If the tax cuts expire andscheduled spending cuts kick in,what eect would that have onthe U.S. economy?

If Congress does nothing and all

the scheduled tax increases and

spending cuts take place, the U.S.economy is likely to suer a severeslowdown and could go back intorecession. That is why we expectthat Congress will eventually moveto avoid going over that fiscal clieither by delaying or diluting thescheduled tax increase andspending cuts.

A recent Blue Chip survey ofeconomists showed that the majorityof forecasters believe that someportion of the fiscal cli taxincreases and spending cuts willstill take place next year, dampeningeconomic growth. But there will bea good deal of uncertainty aboutthe full potential impact until theoutcome of the election is certain.

If Congress puts o diculttax and spending decisions,how will it aect the economyand markets?

Congress has a small window topostpone the fiscal cli until thenewly elected leaders can address

these issues. However, electedocials cannot just extend thingsindefinitely. Congress will needto show a timeline for seriouslyaddressing the nations fiscalproblems.

If it looks like politicians are

dodging dicult decisions, creditrating agencies could downgradethe U.S. debt rating, and that couldcreate another serious shock toinvestor confidence and potentiallythe economy. Congress cantemporarily delay the fiscal cli, butit cannot ignore the fiscal issues fortoo long. Of course, the economicand market impact of delaying thefiscal cli decisions will depend onthe state of the U.S. and globaleconomy early next year.

If the global economy is startingto benefit from this years monetaryeasing, then the U.S. economy maynot be severely damaged by modesttax increases or spending cuts.However, if the global economyis still weakening early next year

when the fiscal cli problems arrive,then the markets will probablybe more volatile.

ADDRESSINGTAXE

Gary Thayer, Chief Macro Strategist for Wells Fargo Advisors

How Washingtonmight aect the markets


16/16

8 9 5 6 6

1

This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is made available

with the understanding that Wells Fargo Advisors is not engaged in rendering legal, accounting or tax-preparation services. If tax or

legal advice is required, the services of a competent professional should be sought. Wells Fargo Advisors view is that investment decisions

should be based on investment merit, not solely on tax considerations. However, the eects of taxes are a critical factor in achieving

a desired after-tax return on your investment. The information provided is based on internal and external sources that are considered

reliable; however, the accuracy of the information is not guaranteed. Specific questions on taxes as they relate to your situation should

be directed to your tax advisor.

Wells Fargo Advisors is one broker/dealer aliate of Wells Fargo & Company; other broker/dealer aliates of Wells Fargo & Company may

have diering opinions than those expressed in this report. Contact your Financial Advisor if you would like copies of additional reports.

Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Ne twork, LLC, Members SIPC, non -bankaliates of Wells Fargo & Company. First Clearing, LLC is a registered broker-dealer and non-ba nk aliate of Wells Fargo & Company. Wells Fargo Advisors, LLC. All rights re served.

Talk to your Financial Advisor

He or she can provide research from Wells Fargo

Advisors as well as outside research resources. You can

also review your current investment strategy and goals

and be prepared to act if anything should change.

Stay tunedOur analysts and strategists will be following all the latest developments regarding the elections,

the U.S. and global economy, the markets, and political news overseas. There are a number of

ways to access our advice and commentary to keep informed about how events may aect

you financially.

Be sure to visit our website for the latest commentary and more details on the tax issues that are

at stake during this election year. There youll find a video that highlights the key points around

income and investment taxes, estate taxes and other tax items that could have an impact on

your personal finances. Youll also find additional reports to help you stay fully informed.

Find additional videos, analysis and more

Go to wellsfargoadvisors.com/taxes

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2012 elections report

Documents