One of the key topics on readers' minds right now is the US fiscal cliff, so below we've posted our newsletter from last week about what its impact on IR could be.
Last week, after a record $6 bn spent on campaigning to end up with the same president in the White House and Congress still dominated by the Republicans, Americans woke up with what must have felt like the most colossal hangover and a terrible, sinking realization: they had less than two months to steer the country away from a fiscal cliff that could put the US back into recession.
What cliff, many wondered, considering 19 of the top 20 news stories on any given day during the last year were about the presidential election (and the 20th was about the Middle East). They could easily have missed the $600 bn bundle of tax increases and spending cuts that will kick in on January 1 unless both parties agree on a deal – and that last is why the fiscal cliff hardly figured in the election bickering.
Lest all you IROs out there reckon the fiscal cliff to be somebody else’s problem, here’s how it directly affects you, as long as you have US investors:
1. With no deal, Bush-era tax cuts would vanish and capital gains tax would go from 15 percent to 20 percent. Dividends, now taxed at 15 percent, would be taxed as regular income, which for high earners could be more than 40 percent. That’s a big difference.
2. Traditional year-end portfolio turnover would thus be turned upside down. Instead of selling underperforming stocks to offset profits and reduce taxes, investors might unload their winners to avoid higher capital gains tax in 2013.
3. Income stocks would be dogs, not the darlings they have been until now. Already some companies are shifting dividend payouts ahead of year-end to save their investors tax heartache in 2013.
4. With dividends out of favor, investors would turn their backs on blue chips and look elsewhere for yield – high-yield bonds, maybe, or emerging markets. Worse, equities as a whole, having already experienced massive net outflows over a long period, would go even more out of fashion if capital gains tax goes up. Retail investors have all but given up on equities. This could push them over the edge.
5. That market slide the day after the election? Mitt Romney’s camp would have you believe it was Wall Street disappointed that their man didn’t get in. But it would have happened no matter who was elected as the fiscal cliff suddenly hove into view amid dissipating clouds of red, white and blue balloons.
6. The post-election dip was as nothing compared to what will happen when the fiscal cliff is inevitably averted but Americans wake up on January 1 with an even worse hangover and the realization that the US will hit another debt ceiling around late February or early March. The Republican-controlled House could sulkily replay its August 2011 bipartisian brinksmanship and put the US face-to-face with another debt downgrade.
So stop trying to catch up on Homeland and switch back to MSNBC or Fox News, as the case may be. Politics are still very much your problem.
By Neil Stewart