Birinyi Associates’ Jeffrey Rubin, is not convinced that the post-election market sell-off is any indication of a prolonged decline or the beginning of a bear market.”With the decline some new and some not new ideas are being bounced around in support of the negative case,” wrote Rubin in a recent research note.
In the note, Rubin outlined six market myths, a list of inaccurate statements accepted as common knowledge by investors. His first — and most timely — observation: tax increases are not a negative for stocks.
Myth #1: Tax increases are a negative for stocks.
Foremost on investor’s minds is the looming “fiscal cliff and how the impending tax increases are a negative for equities. Or are they?
While there has never been such a large combination of spending cuts and tax increases there have been other instances where capital gains taxes have increased (and significantly more so than they are set to on January 1st). We would caution that this time may be different given the combination of tax increases and spending cuts, but in the precious two increases, since 1942, in the capital gains tax rate (1976 & 1986) the record for stocks is mixed having rallied once and declined once.
But more contrarians, like Wisdomtree, are siding with Birinyi arguing that fears are way over blown.
Ultimately, it seems that the historical precedent is just inconclusive.
Rubin includes these charts to illustrate the market’s mixed record:
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