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Stocks Tank After Obama Re-Election – The Next Economic Risk

November 7th, 2012
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11.07.2012

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Stocks Tank After Obama Re-Election – The Next Economic Risk

original article written by Net Advisor

The Dow Jones Industrial Average had its biggest one-day decline following the Obama 2012 re-election. The Dow hit an intra-day low to about 12,886 down -351. The Dow paired some of its losses to close at 12,932.66 down -313.02 or (-2.36%).

I wrote this article because some news sites and bloggers have incorrectly tried to explain the move, many who have no professional experience in this field.

Without embarrassing any of them specifically, some tried to argue that this had nothing to do with Obama’s re-election win. This just tells you what exactly this had to do with. They could have said it had nothing to do with donuts, and what would we be thinking this had to do with?

U.S. Stock Futures Fell Overnight On Obama Win

As someone who has a bit of experience in this field, this was a very easy read. Immediately after Obama was called winning the November 6, 2012 election the S&P Futures fell sharply.

For investor newbies, The S&P 500 Index represents the 500 largest publicly trading companies in America. This is the benchmark index that most equity (stock) fund managers try to and fail to beat each year.

Investors Wake up to Reality: ‘Fiscal Cliff’ May Be Fiscal Reality

Some then argued, oh it’s the “fiscal cliff.” The term “Fiscal Cliff” was coined by the FED’s Ben Bernanke in February 2012. Yes, this is a huge issue, but it is not an unknown or unexpected issue. In August 2011, Congress passed the Budget Control Act of 2011, thus making the ‘Fiscal Cliff’ idea more than a year old now.

The stock market didn’t just go up over the last year, secretly wait until Obama got re-elected, then suddenly fall so people can say “oh, it was the Fiscal Cliff!” The stock market is not a market of conspiracy. The old adage is, “the market is always telling a story.”

Generally the stock market tends to forecast events 6 months in advance, and makes daily adjustments to new information it did not anticipate. When companies are at risk of making less money than expected, their stock will tend to fall. When a broad range of stocks fall in unison, this is not a company specific situation, it is a result of some broader event that the markets did not factor – the 2012 election.

Market Factored Keeping “Bush Tax Cuts” with a Romney & Senate Win

I would argue that the stock market anticipated that the 2001 “Bush Tax Cuts” would remain in place in 2013 or else the market would have sold-off long before the election. The market assumed that a Romney and (R) Senate win would have been more favorable for business, increased jobs, and lower taxes for all. This is now in question, hence the sell-off.

The 2010 Mid-Term election swept the largest number of Democrats out of the House of Representatives since 1928 (report). The Obama Administration was initially against extending tax cuts. After the 2010 elections, the 2001 “Bush Tax Cuts” were extended for one year, until 12-31-2012. Then Obama Administration said in 2011 that he “lowered taxes,” which was not the case (report).

Since the 2012 election did not provide what the market expected, stocks went lower to adjust to new risks. I would argue that the markets will remain volatile especially through year-end unless this problem is resolved, not by giving speeches but taking real action that does not hurt the economy.

$2 Trillion to be Sucked Out of the Economy in 2013

As of January 2, 2013 some TWO TRILLION in new taxes will hit the economy (report). This will be the largest tax increase in history, and could impact up to 90% of the country.

Without congressional action, the following will occur at the end of 2012:

  • All marginal individual rates increase.
  • The capital gains tax rate goes up.
  • The dividend tax rate skyrockets.
  • The death tax reverts to 2000 levels.
  • The AMT patch ends.
  • Marriage penalty relief expires.
  • The child tax credit is cut in half.
  • Annual business “extenders” end.

— Source: U.S. Chamber of Commerce (HTML PDF)

The Poor – NOT the Rich Face the Largest Tax Increase

It seems that over 49 Million people made their Presidential vote based on sound bites. We all heard it right?

Aside from the fact that the Obama campaign video is not accurate, as Romney had no special “tax cuts” for “millionaires” or tax breaks for “oil companies,” etc. Obama & company ran a misleading campaign and 1/2 the country bought into it.

Here is reality.

Under current law as of January 2, 2013 the poorest people – those subject to the lowest tax bracket of 10% will increase to 15%. That is a whopping 50% increase in their income tax!

Here is the math:
15% – 10% = 5%; then 5% divided into 10% = 50%

— Source: Americans for Tax Reform (PDF). Data Calculation: Math learned in 4th grade.

As a percentage of their income, the poor will pay more taxes than anyone else. In terms of actual dollars, the top tax brackets naturally pay the majority of income tax. For the record, it was President Bush who signed into law that lowered taxes for the poor, and the middle-class on June 7, 2001 (report).

Government Shell Game. Image Credit: TFT Staff, The Fiscal Times

Watch the Coming Shell Game: Higher Taxes with Spending “Cuts” (Cough Cough)

What many people fail to understand is that the Fiscal Cliff “deficit cuts” are really a shell game. Sure, defense spending will be cut and so will other programs. But the end result will be more deficit spending, not deficit reduction. I pointed this out the last time the government ran this shell game beginning July 2011 in this 5-part report.

After all the Washington talk about cutting spending and cutting the deficit, in the end, the U.S. credit had faced multiple downgrades (one here, another one here, and looking for another one here). Oh, and the deficit? It went up anyway to an all time record.

The stock market is concerned about more debt leading to another U.S. credit downgrade. Longer-term, the result of more credit downgrades is inflation, devalue of the U.S. dollar, higher mortgage rates, higher credit-card rates, and higher interest rates in general.

HUGE Risks to the Economy – How This Can Impact You

Anyone who thinks that this will affect only the “wealthy” will be in for a rude awaking over the next several years. If government does not adequately address these debt and tax issues now the economic impact will hit beginning 2013.

“Large budget deficits would reduce national saving, thereby curtailing investment in productive capital and diminishing future output and income.

Interest payments on the debt would consume a growing share of the federal budget, eventually requiring either higher taxes or a reduction in government benefits and services.

In addition, rising debt would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or international crises.”

— Source: Congressional Budget Office,  05-13-2012, page 2 of 10 pages (PDF)

EVERYONE will be impacted by this. If you have a job, your payroll taxes will also go up between 4.2% to 6.2%. At the same time if you then lose that job, your unemployment benefits will also decrease.

“The 2% payroll tax holiday and extended unemployment insurance benefits will disappear at the end of 2012, causing employee payroll taxes to increase from 4.2% to 6.2% and reducing the number of weeks individuals can collect unemployment insurance.”

— Source: Marty Regalia, Free Enterprise (U.S. Chamber of Commerce), 05-29-2012

Now we can see why the stock market freaked out and the Dow fell as much as 351 points  today. The market was hoping that this policy would not go into affect, even though the law has been on the books for a year.

With an Obama victory and the Dems keeping control of the Senate means we are in the same place with mostly the same people we were a year ago. Nothing was resolved back then, and uncertainty in the stock market means “sell.”

Another Great Recession Coming Up?

Investors are likely to continue and take profits by year-end to get the current lower tax rate. Capital gains go up in 2013 with an effective tax rate up to 25%, up from current 15%.

“…if the Bush tax cuts aren’t extended, the regular capital gains rate will rise to 20 percent, and another obscure provision will reduce the value of itemized deductions, adding 1.2 percent. The total effective rate on capital gains would then be 25 percent.”

— Source: Washington Post (PDF), 01-25-2012

That is bad news if you are an investor. If government wants to take 25 cents of every $1.00 out of the economy just to support more spending, investors might think twice about investing. That is exactly what investors did during the Great Depression.

During the Great Depression the U.S. government raised taxes mostly on the ‘wealthy’ and business owners. The result: The “wealthy” stopped investing, and business owners closed up shops, which led to higher employment, and the U.S. stayed in Depression (report). The government is doing the exact same thing. If that occurs, where do you think the economy will end up? (Report.)

Stay Tuned.

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