The Dow Jones Industrial Average suffered a nose dive yesterday, falling by 329.86 points – the biggest drop of the year. The culprit being cited as the cause of the down market is none other than Taxmageddon.
If not deterred, Taxmageddon will have an adverse effect on U.S. equities by raising the marginal rate on capital gains from 15 percent to 23.8 percent. In addition, the top dividend rate will increase dramatically from 15 percent to 43.4 percent. (Note: both tax rate increases include Obamacare’s 3.8 percent investment surtax). The U.S. equity market will be forced to adjust to the increased rates by devaluing U.S. stocks; this is bad for investors and the economy as a whole.
Taxmageddon is the biggest concern for investors going into 2013 and with Obama’s re-election being made official on Tuesday, there is little faith in the status quo’s ability to resolve Washington gridlock on budget negotiations.
Much of the lack of confidence over budget negotiations has been directed at the executive office. President Obama has made his intentions on Taxmageddon known by threatening to veto any bill that does not include tax hikes on high-income earners. By demanding to punish high-income earners, Obama has both increased division and uncertainty among those involved in resolving Taxmageddon.
Wall Street has taken note of the current administration’s incompetence on Taxmageddon and has acted accordingly by resorting to a bearish view of the market. Todd Schoenberger, managing principle at the BlackBay Group in New York, told Reuters yesterday:
"Traders on the floor are thinking, before the election President Obama wasn't able to resolve the fiscal cliff so what makes you think he's going to be able to do it after the election? That's the big issue right now,"
Since earlier this year, investors have been reducing their exposure to U.S. equities in an effort to hedge against the devastating effect Taxmageddon would have on U.S. stocks and the economy. Further decreases in exposure to U.S. equities is expected with the re-election of President Obama, as he likely will push taxpayers off the fiscal cliff.
By casting a vote for President Obama, voters may have indirectly approved a $500 billion tax hike that will more than likely plunge the U.S. back into recession, setting the tone for more government intrusion in their lives.