In the aftermath of the Obama victory, concerns over the possible negative consequences of increasing tax rates on income, capital gains, and dividends, the possibility of depreciation on commercial real estate going away or at least the ability to write-off depreciation being reduced significant, the possibility of tax advantages on tax-free bonds being reduced or going away completely, the looming fiscal cliff, which the CBO has already stated will cause a recession early next year, and a whole host of other potential problems is driving stocks down dramatically today. It makes you wonder what people were thinking yesterday when they ran stocks up.
The Dow is off almost 300 points; breaking the all-important 13,000 level. The S&P 500 has broken down through 1,400 also, which is even more significant, since the S&P 500 is a much more broad-based index (500 stocks versus only 30 for the Dow). This technical damage will likely result in much more downside for stocks, which is what I have been expecting for several weeks (and which is why I sold the majority of positions I held for clients weeks ago at higher levels.
Investors should take great care to evaluate their tax situations, because, if tax rates are to increase next year, especially on capital gains and dividends, it will probably make more sense to lock-in profits during 2012. Keep in mind that all investors should be looking at this same issue, which should result in a lot of selling between now and the end of 2012 (less than 2 months from now). For this reason, there should be constant downward pressure on stocks through the end of the year (at least).
I do not expect Congress to do anything about the fiscal cliff before next year (if at all). Obama has made it clear that he wants to let the Bush tax cuts expire, at least on the higher income earners (at $250,000 and above). Congress has no incentive to act between now and the end of the year, and the fight over these issues will be contentious and time-consuming. I am not optimistic that we will see a positive outcome that will result in the avoidance of another recession (double-dip) early in 2013.
From an investment standpoint, my hope is that stocks oversell, creating a good buying opportunity, despite these challenges. If valuations become attractive enough (low enough), I will begin to buy. I stand ready with lots of cash to do exactly that.