Higher Taxes, Spending Cuts Weigh on Investors
Major U.S. stock indexes extended losses Thursday after falling more than 2% on Wednesday. Investors have decided to take profits in the face of possible tax increases and fiscal cliff concerns.
The Dow Jones Industrial Average was down 50 points in recent trading. Those losses come a day after it dropped 313 points and finished Wednesday's session below 13,000, marking its largest daily decline in a year. The S&P 500 Index had its worst performance on Wednesday since June, falling 2.4% to 1394.53.
As The Daily Ticker's Aaron Task and Henry Blodget discuss in the attached video, part of the reason for Wednesday's selloff stemmed from the expected tax changes that will occur under President Obama's second term.
Rates on capital gains will likely be raised to 20% from 15% on individuals earning more than $250,000. A higher capital gains rate would theoretically make stocks less attractive to investors.
Low capital gains tax rates are widely believed to encourage investment, create jobs and raise total tax revenue. The tax rate on capital gains has been lower than the rate for ordinary income for decades.
The higher capital gains theory was also explained for the dumping of Apple (AAPL) shares Wednesday. Apple stock slid nearly 4% on Wednesday to $558, twice as much as the broader stock market decline.
Wednesday's selloff could also be viewed as a market correction. Earnings, though generally poor last quarter, are still at record highs and stocks are overvalued in relation to future earnings. The so-called fiscal cliff — deep automatic federal spending cuts and tax increases scheduled to take effect in January — has also been a top concern for traders and investors. House Speaker John Boehner extended an olive branch to President Obama Wednesday by saying Republicans would consider raising tax revenues as part of a deficit cutting deal.
Most economists as well as the Congressional Budget Office have warned that the fiscal cliff could tip the U.S. into recession if a compromise between the two political parties cannot be reached. Lawmakers have until the end of the year to resolve the fiscal drama. The markets will be watching.
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