Sometimes it’s no fun when you’re right.
I wrote in the column Nov. 2 that I thought we would see an increase in market volatility if the president was re-elected and the Republicans held the House, and unfortunately that’s exactly what’s been experienced since Election Day. Since Nov. 6, the S&P 500 is now down more than 5 percent; that’s a pretty big drop in just over a week.
The issue, of course, is the fiscal cliff, something we’ve been talking about here for some time. Immediately following the election the issue has taken center stage, the media being only recently distracted by the really strange Petraeus sex scandal.
I really can’t blame higher-income investors for selling stocks, as for once short-term market behavior seems fairly rational. Unless the politicians in Washington come to some kind of compromise, taxes related to investment become dramatically less favorable next year.
Right now as it stands for higher income taxpayers (adjusted gross income over $200,000 single and $250,000 joint), long-term capital gains tax rates on profits from stock investments will rise from 15 percent to nearly 24 percent, and taxes on qualified dividends will rise from the current 15 percent to a whopping maximum potential rate of 43.4 percent. These rates include a 3.8 percent tax surcharge as new taxes from Obamacare legislation begin to take effect.
So investors can’t really be blamed for taking some money off the table now, considering the risk presented by these much higher potential tax rates. The result is a declining stock market.
Now here’ s the real rub. The massive national debt and federal deficits at extreme levels have contributed to suppressed interest rates on bank deposits. This has resulted in many retirees turning to stock dividends for the retirement income they need, and now federal tax policy may lead many corporations to decide that rewarding their shareholder with dividends is no longer efficient or desirable. Where will retirees turn then? This is no easy time to be retired.
With all this uncertainty on the horizon, Americans are behooved to do some planning. A couple suggestions to explore are taking profits on appreciated stock positions, keeping an eye on dividend paying stocks for dividend cuts and price weakness, considering Roth IRA conversions now in the lower income tax environment, perhaps doing some gifting before estate tax rules change and taking another look at tax-free municipal bonds.
And of course, to hold on to your hats, the next month and half is going to be bumpy.