The returns are in and the concession speeches have been made. Now what?
Now you should sit back and think about your financial future, says James Annable, chief economist of First Chicago NBD Corp.
Annable and his associates have spent most of the last six months forecasting what would happen to the economy if President Clinton was re-elected and the Democrats took control of the house, if Clinton was re-elected and the Republicans maintained their advantage in Congress, or if Bob Dole won a surprise upset.
“The financial markets want to make sure the government stays about where it is,” Annable said the day before the elections. And as the country now knows, that’s just about what happened.
“Basically, the outlook is very supportive for investors going forward over the balance of next year. Interest rates look like they’ll stay low, and depending on what the Federal Reserve does, longer-term rates could come down a bit more,” he said, adding “Put that together with rapidly growing profits and you’ll continue to see a rising stock market.”
Annable feels Americans ought to “lean back and cheer for (Federal Reserve Bank Chairman) Alan Greenspan. What’s happening in the economy has been a benefit to the average citizen. There’s a low unemployment rate, a rising stock market, falling interest rates and lower mortgages.”
The good news is that this economy has relatively little to do with the election, but a lot to do with the Federal Reserve keeping inflation down while allowing growth to continue, Annable notes.
Many economists feel that the American economy has reinvented itself, starting with what used to be known as the Midwest rust belt. “Now, that area is about the most competitive exporter in the world. It’s extraordinary how efficient the US economy has become. It’s scaring everyone, including the Germans and Japanese,” Annable said. “The indicator is how much profits have grown. We’re an economy that is export-oriented, investment-oriented, and this is pushing up the standards of living.”
So what do the election results mean for the average home buyer, home seller and home owner?
There’s a plethora of good news here, too, Annable believes.
Seeking to woo the 67 million homeowners in this country, both Clinton and Dole promised up juicy capital gains tax cuts for those homeowners who sell their homes.
Currently, sellers may defer capital gains taxes by using the 24-month rollover replacement rule, which allows you to rollover your profits into another property provided it costs the same or more as the home you just sold. Once you or your spouse reach the age of 55, and meet other requirements, you may take a one-time $125,000 capital gains exclusion.
Both Clinton and Dole promised capital gains relief for home sellers. If elected, Clinton vowed to increase the capital gains exclusion to $500,000 and make it available each time a homeowner sold his or her property. Dole’s capital gains relief was less generous, raising the capital gains exclusion to $250,000, and Annable says in the end, there will be some relief, but not as much as was proposed.
“The campaign is over and realism will start to set in and frankly, unless limited, reducing the capital gains tax on home sales can be costly,” he added.
In terms of the housing equation, Annable believes that one way Americans might be asked to pay for the capital gains relief is by lowering the amount of home mortgage interest that you can deduct from your federal income taxes. While Annable says that is more likely to come about in a Democratic Congress, Republicans have been known to talk about it as well. Fortunately for home buyers and owners, organizations such as the National Association of Realtors and the National Association of Home Builders maintain powerful lobbies on Capitol Hill to fight such legislation.
Is Bob Dole right when he says a recession is coming? Annable doesn’t think so, which means home buyers who have been sitting on the fence should jump off and make an offer.
“This economy is most remarkable in how well balanced it is. Recessions historically happen because inflation gets high and the Federal Reserve induces a recession to reduce inflation, or there is a large inventory overhang and we accidentally slip into recession. I think it’s even money that we can get through the next four years without a recession. That would be our longest expansion since the 1960s,” he says.
If that happens, look to the stock market for continued growth. “The S&P 500 could hit 1,000 by the year 2000 and the Dow could strike 10,000,” he says. “It’s within shooting distance.”
Oct. 28, 1996.