Friday, January 18, 2013

It’s not Over ‘til it’s Over

When the dust settled, turns out worries about the Fiscal Cliff and the Mayan 2012 End of the World prediction turned out to be a waste of emotional energy.  Sort of like the Shakespeare play, Much Ado about Nothing.  

At least, so far…..

As expected, Congress and the White House procrastinated and pushed out resolution of many problems into the future.  On the other hand, many issues relating to taxes where resolved with somewhat surprising clarity.

Unless your annual income is higher than $400,000, your incremental income tax rate did not change.  In fact the Bush-era tax rates were permanently extended for everybody making less than $400,000. ($450,000 for married filing jointly)  Taxes due on dividends and capital gains did not change for those making less than $400,000. If you were in the 15% (or lower) income tax bracket, your tax on dividends is still ZERO.  For everybody making less than $400,000, taxes on dividends and long term capital gains remains at the low rate of 15%.  For high income earners (above $400,000/$450,000) the tax rate on dividend and capital gains goes up to a still low 20%. 

Dividend paying stocks still look like a very good deal from an after-tax income point of view---for almost everybody. Look for them to return to popularity after lagging the market in 2012.

Generous 50% bonus depreciation and Sec 179 expensing for equipment was extended thru 2013—still a big incentive for small business to make investments this year.

Estate tax limits were raised to a $5 million exclusion, with the rate increased to 40%. Most folks won’t have to sell the family farm to pay the estate tax.  This exclusion makes the estate tax irrelevant for all but the truly wealthy. It also means that the net amount that people expect to inherit is up---many people will feel more wealthy and hence spend more.

All in all, not a bad “temporary” outcome—and the markets reacted by rising rapidly.

But, as they say,  “Don’t Count your Chicks before they Hatch”— government spending all over the world continues to far exceed tax revenues and the government continues to borrow huge sums, creating an alarmingly high government debt.  Sooner or later this will be resolved by actions that slow the economy or raise inflation—or both. Everybody knows we have a problem—but there is a big argument regarding the solution. Like Yogi Berra said, “It’s ain’t over til it’s over”.  And, the press is likely to hype every event as the process and political fight moves along.  Emotions of fear and greed will alternate back and forth as usual.

Markets were oversold in December and moved quickly to perhaps an overbought condition today. (With many notable exceptions for individual securities and some sectors.) At some point, expect a correction, but it impossible to predict when.

Be prepared for continued volatility.  Stay focused on the long term as everyone else seems to be focused on the short term.   Be cautious, but not too cautious.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

As a service to my clients, links to articles that go with the headlines are available at my “with permission only” Twitter site: @waynestrout When encountering any comments there thought to be political, please consider I am a politically conservative Independent. I believe in small government strong enough to protect individual liberty and active enough to promote general prosperity; personal responsibility and personal liberty; a strong defense but with a reluctance to make war; and a compassionate Christian based (Love thy Neighbor) charity toward the disadvantaged.