Like most Americans, I have been utterly disgusted with the way our “leaders” in Washington have handled the vote on tax laws that make up the so-called fiscal cliff of 2012. Less than a week ago, we thought it was unconscionable that Congress would not come to a consensus before the Christmas break, let alone year end.
Having just read a Wonkblog post titled “Your fiscal cliff deal cheat sheet,” I have reached the conclusion that a delayed vote may have actually been a good thing for the U.S. stock market.
Before I explain why I think it was a good thing, let me share the key element from the aforementioned cheat sheet that led me to my conclusion:
“The tax on capital gains and dividends will be permanently set at 20% for those with income above the $450,000/$400,000 threshold. It will remain at 15% for everyone else. (Clinton-era rates were 20% for capital gains and taxed dividends as ordinary income, with a top rate of 39.6%.)”
The reason why I feel the delays in the vote was a good thing is that we investors were left with just enough doubt and just enough hope to adopt a wait and see attitude with our investments.
Had the folks with incomes over $400,000 known for certain back in December that the amount of tax they would be paying on capital gains and dividends would be significantly higher in 2013, they most surely would have taken some of their gains off the table while the getting was good.
Translation: There likely would have been a sharp sell-off of stocks by those in the affected income brackets. The trouble with investor mentality these days is that people too often exercise a herd mentality. Even though the proportion of people in the affected income brackets is relatively small, dumb money tends to follow smart money. We would have likely seen a lot of middle-income investors shifting out of stocks merely to protect their accumulations.
What happens now?
Now that the American public has more certainty aboutwho will be dinged with higher taxes and by how much, I am inclined to believe the stock market will not see a broad sell off as we might have seen if the Congressional vote had taken place prior to December 31. Now there is no incentive for people in the affected income brackets to sell securities since they’ll be hit with the higher tax rates for doing so.
As I write this, about 12 hours before the first trading day of 2013, U.S. stock market futures lead to a strong open across the board on January 2. Time will tell what the lasting impact of the tax increases will be.
I don’t know if preventing a market meltdown was on the minds of our politicians these last few weeks or not, but in retrospect I’m glad they deferred the vote until 2013. Don’t misunderstand me. I still don’t trust them. In all honesty, I’m as uneasy as ever about our country’s fiscal health with the matter of the debt ceiling looming on the horizon once again.