What a (Half) Deal!
Thursday, January 10, 2013
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

Taxes on Social Security Benefits
Your portfolio can impact how your benefits are taxed.

Insurance Product Primer
Insurance products can play a role in financial and tax planning.

New Health Care Reform Taxes
Two new taxes related to health care reform went into effect.

AAII Discussion Boards
Are you making changes because of the new tax code?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 46.4%, up 7.7 points
  Neutral: 26.6%, up 1.5 points
  Bearish: 26.9%, down 9.3 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »


Investors looking for clarity out of Washington got half of what they wanted. As America was falling off the fiscal cliff, Congress agreed to new tax legislation. It also agreed to take an additional two months to decide what spending cuts should be made. Evidently, the threat of sequestration (automatic cuts) was not enough to prevent Congress from doing what it does best: postpone tough decisions on spending.

It’s a mixed bag. The new tax legislation enshrines much of the Bush-era tax cuts. The American Taxpayer Relief Act of 2012 keeps tax rates on earnings, capital gains and dividends unchanged for most Americans. Affluent couples earning more than $450,000 and single filers earning more than $400,000 will pay a higher 39.6% income tax rate and a 20% tax rate on long-term capital gains and dividends. The alternative minimum tax is permanently patched.

There are other aspects of the law that have not been as widely publicized as the aforementioned rates. Those of you who are age 70 1/2 or older can make charitable tax-free IRA distributions of up to $100,000 through the end of 2013. If you have not made a 2012 tax-year charitable distribution from your IRA yet, you can distribute up to $100,000 by January 31, 2013, for 2012 and up to $100,000 by December 31, 2013, for 2013. Sales taxes can be deducted in lieu of state income taxes through 2013. The new 3.8% and 0.9% taxes that go into effect this year as part of the health care reform act still stand.

The new legislation also extends a long list of business tax credits. Among them is the 50% bonus depreciation deduction through 2013, with some transportation property eligible for the deduction through 2014. The research tax credit, which had expired in 2011, was extended through 2013. Also included are many special interest breaks such as those for motor sport race tracks, qualified film and television production, and mine rescue team training. Carried interest, a favored tax break for hedge fund and other money managers, is also maintained. To the best of my knowledge, the thorny issue of repatriating money earned overseas was not covered by the new law.

Though individuals and businesses have a better understanding of future tax rates, the new law failed to accomplish two big things. First, it did little to simplify the tax code. Second, if there was any discussion about whether our current tax rates, deductions and credits make any economic sense, it certainly was not apparent. Our politicians seemed more focused on revenue targets and ideology than figuring out a tax code that provides the best balance of required revenues and economic benefits. It is a missed opportunity that could have helped economic growth.

The next fiscal debate will be about spending. The national debt needs to be brought down in a prudent manner, and we can’t adequately reduce it simply by raising tax rates. It is a math problem whose solution will impact the lives of many. Compounding the problem are political ideologies and the simple fact that what is pork-barrel spending to one legislator is a valuable program to the constituents and campaign contributors of another legislator.

Given the recent events and the divided nature of Congress, it seems probable that the politicians will take the full two months to come up with a solution. Compounding matters is another potential battle over the debt ceiling. The uncertainty is likely to keep clouds over the stock market and potentially create some skittishness in the bond market. Whether the debate will create enough turbulence to reduce prices or just enough to limit their gains is unknown.

You can fret about it, or you can invest through it. Congress and the White House will come up with some solution because they have to. It won’t be ideal or perfect, but it will be a solution. Hope for the best, but understand that you have to invest in the market you are given, not the one you want. Waiting for an all-clear signal or pulling away from the market because you don’t like the current environment can cause you to miss out on good gains. Such was the case last year, when money was pulled from domestic stock mutual funds even as many of the funds achieved double-digit returns for the full year.

Finally, if the political process frustrates you, contact your legislators and the President. After all, you are the politicians’ employer.

More on AAII.com

The Week Ahead

Approximately 35 members of the S&P 500 will report fourth-quarter earnings next week. Included in this group are Dow components JPMorgan Chase (JPM) on Wednesday; American Express Company (AXP), Bank of America (BAC), Intel (INTC) and UnitedHealth Group (UNH) on Thursday; and General Electric (GE) on Friday.

The week’s first economic reports will be the December Producer Price Index (PPI), December retail sales, the January Empire State manufacturing survey and November business inventories, all of which will be released on Tuesday. Wednesday will feature the December Consumer Price Index (CPI), December industrial production and capacity utilization, the National Association of Home Builders January housing index, and the periodic Beige Book. December housing starts and building permits and the January Philadelphia manufacturing survey will be released on Thursday. Friday will feature the preliminary University of Michigan January consumer sentiment survey.

Three Federal Reserve officials will speak publicly. San Francisco President John Williams will speak on Monday. Philadelphia President Charles Plosser will speak on Tuesday. Dallas President Richard Fisher will speak on Wednesday.

AAII Sentiment Survey

Optimism rebounded strongly, as pessimism dropped in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 7.7 percentage points to 46.4%. This matches the short-term high set on December 20, 2012. Bullish sentiment is also above its historical average of 39% for the sixth time in seven weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 1.5 percentage points to 26.6%. Even with the improvement, neutral sentiment is below its historical average of 30.5% for the 13th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 9.3 percentage points to 26.9%. Though the magnitude of the increase is steep, it only puts pessimism at a three-week low. Bearish sentiment is also below its historical average of 30.5% for the fourth time in five weeks.

At current levels, both bullish and bearish sentiment are within their typical historical ranges.

The resolution to the tax policy portion of the fiscal cliff has removed some of the uncertainty that individual investors were facing. Higher stock prices, monetary stimulus, continued economic growth, seasonality and a lack of negative headlines are also playing a role.

» Take the sentiment survey