(2 of 4)
BERNSTEIN: He's not saying anything, so who knows? If he does nothing, it will effectively be a tax increase because certain tax cuts will expire. So he doesn't have to be aggressive; all he has to do is sit back.
VALLIERE: The big one is December 31, 2008. That's when the dividend and capital-gains rates of 15% go back up. The estate-tax cut expires in 2010.
TIME: Is there any practical advice for investors while taxes are front and center?
BERNSTEIN: Two things: There's a feeling that when taxes are raised, it's bad for the market. That's not necessarily true. Clinton raised taxes, and we had a bull market. People should invest on a pretax basis. The after-tax effect is icing on the cake.
VALLIERE: Stocks that have good dividends are going to be fine for the next couple of years. If Bush wins, he's going to try to make the 15% rate permanent. If Kerry wins, his efforts to abolish the 15% rate would run into a brick wall.
TIME: Stocks tend to do best under Democrats, which surprises people.
BERNSTEIN: Yes. We looked at 1943 to the present and tested different periods. The results were consistent. Under Democrats, the optimal asset allocation is two-thirds stocks, one-third bonds. Under Republicans, it is 64% bonds, 36% equities. Consumer stocks perform better under Republicans, and industrials tend to perform better under Democrats. The one that really shocked us: energy tends to perform better under Democrats.
TIME: Wow. With Bush's oil ties?
BERNSTEIN: Maybe it's that Democrats can actually do things to help the energy sector, whereas Republicans can't because it would seem self-serving.
TIME: It certainly makes you think twice about investing on stereotypes.
VALLIERE: To that point, people say Kerry would be good for bonds, based on his wanting to cut the deficit. I'm unpersuaded. In order to be good for the bond market, he would have to undo the Bush tax cuts. That's not going to happen.
GALLAGHER: In the short run, Bush is good for stocks, and, yes, Kerry is good for bonds--stocks because of the dividend-tax issue and bonds for a couple reasons. One is that Clinton's policies produced budget surpluses and Kerry sees things much the same way. Meanwhile, Dick Cheney is saying that deficits don't matter. Then you have the gridlock argument. The bond market would assume Kerry's spending initiatives would get frustrated. So you lower the deficit that way. And Bush does talk about Social Security reform. Under typical proposals, that would add about a hundred million dollars a year to the deficit for the next 10 years.
TIME: But it sure would help the financial-services industry.
GALLAGHER: Financial services would benefit more from an expanded IRA, which has a greater chance than Social Security reform. Reform wouldn't funnel money into private mutual funds but to companies that index the market. The tax-free savings account is a bigger deal.
VALLIERE: Even if there were Social Security reform--and I think the chances are below 50%--they will cap the fees. I talk to people in my industry who think they wouldn't make any money on it.