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Stocks Rally at Start of 2013

Market Digest – Week Ending 1/4

Rather than plunging off the fiscal cliff, stocks shot upward to start the New Year. While far from perfect, the new tax legislation was good enough to eliminate the worst fears. Fed minutes from the December meeting showed significant division over how much longer bond purchases should continue.  The implication is that the Fed could scale back or eliminate purchases as soon as the end of the year. Treasuries dropped. A solid jobs report further dampened the appeal of government bonds.

Weekly Returns:

S&P 500: 1,466 (+4.6%)

MSCI ACWI ex-US: (+2.7%)

US 10 Year Treasury Yield: 1.90% (+0.20%)

Gold: $1,656 (0.0%)

USD/EUR: $1.307 (-1.2%)

Major Events:

  • Tuesday – Congress passed a bill averting most spending cuts and tax increases comprising the fiscal cliff.
  • Tuesday – Congress passed a bill averting most spending cuts and tax increases comprising the fiscal cliff.
  • Wednesday – The S&P 500 jumps 2.5% on relief over the fiscal cliff solution.
  • Thursday – John Boehner is re-elected Speaker of the United States House of Representatives.
  • Thursday – Fed minutes show officials are divided on continued asset purchases, increasing the likelihood they could stop or be reduced in 2013.
  • Friday – Payrolls in December added 155,000 jobs, roughly in line with consensus estimates. Unemployment remained unchanged at 7.8%.

Our Take:

The fiscal cliff agreement had many shortfalls. It made the tax code more complicated, failed to seriously address spending cuts or the debt ceiling, and contained a lot of pork. Still, the core tax rate solution was reasonable and its passage is better than continued uncertainty. Maintaining current rates for most individuals and putting a permanent AMT patch in place were both positives. The stock market will be happier knowing we won’t have to go through this again in a year or two. Indeed, markets rallied on the news because many investors did not expect a deal to come to fruition. In reality, the two sides were not very far apart and an eventual deal was almost inevitable. We were glad to see an agreement, but are neither more bullish nor more bearish as a result of the New Year’s Day solution. Here are the highlights:

Income tax increases for individuals making $400,000+ per year, families making $450,000+ per year. Tax rates rise from 35% to 39.6%.

  • Capital gains and dividends taxes for this group will rise from 15% to 20%.
  • Wealthy Americans will also face a health care reform surtax of 3.8% on capital gains, making the total capital gains tax rate for this group 23.8%. Reduced itemized deductions could potentially push this to 24.8%.
  • Those in the 25%, 28%, 33% and 35% income tax bracket will continue to pay 15% on capital gains and dividends.

2011-2012 payroll tax cut eliminated. This refers to the 2% decrease in Social Security tax paid by workers on income up to $113,700, restoring the rate to 6.2%.

Estate and Gift Tax lifetime exemption unchanged. It will remain at $5 million or more per individual.

  • For 2013, top estate tax rate to increase to 40% from 35%.

Alternative Minimum Tax (AMT) permanently adjusted for inflation.

American Opportunity Credit for education extended five years. This credit is worth up to $2,500.

Child tax credit extended five years. This is worth up to $1,000.

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