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A year ago, Goldman Sachs’ David Kostin said the S&P 500 would end 2012 at 1,250.And he’s sticking to that call.
This implies stocks fall 8 per cent from here.
“Uncertainty swirling around the ‘fiscal cliff’ that must be resolved by year-end, the pending jump in capital gains taxes at the start of 2013, and the debt ceiling that will be reached in late February represent clear and present downside risks to the market in the near-term,” writes Kostin in his US Weekly Kickstart note.
Kostin thinks a fiscal cliff deal will get done by year end. But past experience tells him that a deal will come as close to the end of the year as possible.
Debate regarding a two-year extension to the 2001/2003 Bush income tax cuts was not resolved until December 17th, 2010. Last year’s decision to extend payroll tax cuts was not finalised until December 23rd, 2011. The current challenge is significantly more complex. Divergent views on tax policy, defence spending, and entitlements need to be resolved in a short lame-duck session of Congress. Political platitudes about compromise will abound during the coming weeks but some disagreements will surely arise. We assign a 55% likelihood that an agreement is reached by year-end.
Regarding the threat of rising capital gains and dividend tax rates, there is precedent for what happens to stocks, and it’s not good.
Capital gains taxes are scheduled to rise at the start of 2013 from a 15% rate to 23.8% (20% plus a 3.8% tax associated with the Affordable Care Act). The nearly 9 pp hike in capital gains taxes is similar in magnitude to the 9 pp rise in 1970 and the 8 pp rise in 1987. In both prior cases S&P 500 posted negative returns in December as investors locked-in the lower tax rate. The S&P 500 fell by 1.9% in December 1969 and 2.8% in December 1986 running counter to trend given December has the second highest average monthly return (1.5%) and a 75% hit rate of positive return since 1928.
Here’s a chart of historical investment tax rates from an older Kostin note:
Photo: Goldman Sachs
Kostin remains more optimistic about next year. He reiterated his 2013 year-end target of 1,575.
GOLDMAN: The Fiscal Cliff Could Force These Companies To Dump Tons Of Cash On Their Investors
Read more: http://www.businessinsider.com.au/goldman-the-fiscal-cliff-special-dividend-stocks-2012-11#ixzz2CdtVtN9Y GOLDMAN: The Fiscal Cliff Could Force These Companies To Dump Tons Of Cash On Their Investors
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