Anybody who thinks investment and politics are unrelated subjects hasn’t been paying much attention lately.
Here’s the handwriting on the wall for investors as 2002 comes to a close:
– Tax cuts and a significant economic stimulus package are much more likely to become reality next year due to the strong Republican showing in the mid-term elections.
The proposal to carve out part of the Social Security trust fund for “se- parate accounts” to allow individuals to invest in the markets will be taken seriously again.
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– The Federal Reserve’s recent move to reduce interest rates by one-half of 1 percent to a 44-year low and stay “on hold” for a while means we may have seen the last of the rate cuts.
– Concerns about Iraq and the potential for war will continue to inject uncertainty into the stock market for the foreseeable future.
– Investor confidence in the system has become even shakier following the embarrassing resignations of Securities and Exchange Chairman Harvey Pitt, SEC Chief Accountant Robert Herdman and Accounting Oversight Board Chairman William Webster after revelations about Webster’s role at U.S. Technologies.
“By late winter you’ll see a new economic stimulus package that includes a tax rebate check and an increase in the child tax credit (which had originally been slated for 2005),” predicted Greg Valliere, chief strategist with the Charles Schwab Washington, D.C., Research Group. “There will likely be investor provisions too, making it possible to write off more than the current $3,000 annually in capital losses and to put more money into 401(k) plans and individual retirement accounts.”
Getting individuals back into the market and stimulating the economy are primary goals.
One significant step, accelerating the Jan. 1, 2004 segment of President Bush’s across-the-board tax cuts for all except the lowest tax brackets to Jan. 1, 2003, would cost an estimated $22 billion. There’s also the possibility of compromise to allow stock dividends to be taxed at the more advantageous 20 percent long-term capital gains rate, Valliere added. Of course, a lot can happen between now and serious Congressional discussions in late January and final action expected in February.
“A sexier economic stimulus package with a bigger complement of tax cuts could run into real trouble if the economy finally catches some wind in its sails and the Fed reverses its stance and starts raising rates,” cautioned Chuck Gabriel, political analyst with Prudential Securities in Washington, D.C. Individuals were the focus of the 2001 Bush tax cut, while business cuts dominated the spring 2002 tax package. A mix of two-thirds individual and one-third business tax cuts is likely this go-around, Gabriel expects. “The consumer is still spending and I believe all these proposed steps to help the consumer, such as making previous tax cuts permanent and eliminating the death tax, are not the prescription for this economy’s ills,” warned Richard Yamarone, chief economist with Argus Research Corp. in New York. “The corporate sector is having a hard time, with economic data showing a skid in business investment and a quicker pace of worker layoffs, and none of these proposals help corporations hire people.”
The Fed has gone above and beyond the call of duty, Yamarone believes, so it’s now government’s turn to make a difference in the economy.
“I’m looking for moderate economic growth next year and, if that forecast comes to fruition, I wouldn’t expect the Fed to be lowering rates anymore,” said Paul Kasriel, chief economist for The Northern Trust in Chicago. Partial privatization of Social Security, which didn’t hurt Republican politicians who espoused it in mid-term elections, will again be pushed. Poor market performance has been holding it back, but that might change with any sustained market revival. Republicans claim they can accomplish the changes without raising taxes, cutting benefits or increasing the deficit, while Democrats consider that unlikely. The one certainty is that Social Security will remain a “hot potato” issue.
As the year winds down, investors remain distrustful of corporations and the markets, which makes recent SEC bumbling a big concern.
“You might argue we’ve missed an opportunity to go further to remove conflicts of interest,” acknowledged Prudential’s Gabriel. “But with the voluntary reforms the NASD, NYSE and SEC agreed to last May, and with passage of the Sarbanes-Oxley Act that requires every corporate executive to attest to accuracy in financial reporting, the consumer has already benefited and may now get interested in stocks again as things get back to normal.”