Let’s hear it for higher taxes and no spending cuts! (Read more on the fiscal cliff resolution below.) The market loves today’s fiscal remedy (which isn’t a remedy actually) and is rallying big, as the focus remains on Washington and not on company earnings fundamentals. As we continue to say, fundamentals should be driving stock prices, not whether or not the next round of quantitative easing is coming.
Looking at today’s movers, financials saw a nice pop as banks continue to benefit from the stimulus environment we are in. Shares of Citigroup (C), JP Morgan (JPM), and Bank of America (BAC) all went higher. Wall Street analyst upgrades moved names like U.S. Steel (X), Cummins Inc. (CMI), and Caterpillar (CAT) higher. Believe it or not, we did see a name in the red, including Kohl’s (KS) which lagged after receiving negative analyst commentary.
Fiscal Cliff Rubber Stamp Deal
Here’s a summary of how the fiscal cliff deal will affect investors this year:
- Capital gains (and dividend) tax rates will rise from 15% to 20% for individuals making over $400,000, or families making over $450,000. Both of these groups will also pay an added 3.8% tax surcharge on capital gains/dividends to fund Obamacare.
- Individuals earning less than $400k or families earning less than $450k will see no increase in dividend or capital gains taxes.
- However, families earning between $250k and $450k are also subject to the 3.8% surcharge on investment income, bringing their effective tax rate on investments to 18.3%.
- The deal includes funding for a one-year extension of supplemental unemployment insurance benefits.
- Retirees dodge a bullet with no “chained-CPI” formula enactment (however cost-of-living increases data will continue to be skewed to a minimum, if recent history is any indicator).
- The 2% payroll tax cut expires, meaning the vast majority of all Americans will pay higher income taxes this year. This means that an employee’s share of Social Security leaps from 4.2% up to 6.2%. For example, a $50,000 a year worker pays an extra $1,000 in payroll taxes in 2013.
Meanwhile, the government avoided any kind of spending cuts whatsoever! We, the people, will simply foot the bill.
Media pundits will come on television today and pay homage to the policymakers, touting their courage in pushing the fiscal cliff deal through. Most will point to the positive stock market reaction at today’s open for proof that politicians did the right thing. After all, it’s about the here and now, isn’t it? That’s what the media wants and that’s what they got. Meanwhile, the bottom line remains the same: taxes went up with no spending cuts. If only we could “kick the can” on reducing debt and be praised for it in our own personal lives, huh?
In the meantime, we will ride out the daily market gyrations as we always have done. No one will fret about market rallies, and we certainly like to see green over red any day. When the fundamentals once again take center stage, that’s when well-prepared investors will be positioned properly.
Thanks for reading everybody. I’ll see you tomorrow!
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