Where will we be in 2013, will the U.S. reach a compromise on spending and taxes?
Whether or not we enter January 1st with a deal investors have to prepare for any economic situation. For the past few years in a near zero interest rate country dividend stocks were the best alternative. Starting next year dividend income could be taxed as ordinary income, for high income earners that could be as high as 43%. All of a sudden dividends may not be as attractive as they once were for some, for baby boomers dividend paying stocks still are one of the best alternatives keeping some of the gain is better than keeping none.
Other issues to consider are the impact other countries will have on the global economy. Europe is not getting out of recession nor fixing their economic woes any time soon. Japan is also in deep debt and is a reminder of what can happen in a lost decade and beyond as a result of an asset bubble. Even if the possibility of the U.S. entering a recession as early as the first quarter of 2013 is small, investors may continue to react quickly and aggressively by dumping equities. Whether or not a tax hike and government spending cuts are necessary this could take the U.S. back into a recession. Cuts on Medicare alone would cut jobs and cause havoc for the elderly who are already having a tough time stretching out their retirement nest.
This market is about survival of the fittest old and young are having to invest with about the same amount of risk to make up for low interest rates. The young are cutting pennies and eating out less as if they were in their golden years, elders are having to go back to work for lower salaries as if they were millennials. In either case stocks are still the better alternative for the long run even if tax hikes are eminent. Investors can hold on to their stocks for the long run and sell when tax rates become more favorable. As the Fed continues to purchase bonds inflation is also a concern. This can be hedged through stocks but if the situation gets out of hand real estate is an option that has to be considered. During inflation and currency devaluation a piece of real estate can be a good hedge, it is an asset that can be lived in or rented out while the uncertainty and inflationary period goes on. In difficult economic times and while the tax law is not clear diversification is the best alternative. Leaving some money in cash is also a good financial move to wait and see where it should be allocated. If inflation starts accelerating investors do not want to be mostly in cash that is why being 100% in cash is not a good idea for anyone.
Is a bear market creeping nearby for the U.S. or is this a good buying opportunity?
If there is a deal that extends our current tax rates in our stockings this year this could send all three indexes up by more than 5%.