Stock Market: Stay The Course But Watch Out For Ripples Ahead
The good news is that the market has seen little correction since last July: the bad news is that investors with funds to spend are feeling somewhat wistful for the buying and selling opportunities created by past rallies and major corrections. Though many investors are content with the slow and steady growth curve we've been experiencing, more aggressive cash-rich market players miss the buying opportunities created by more market volatility. Investors like this, who are impatient with a market whose rate of correction and declines has approached historic lows, may be about to get the shot of excitement they crave.
The specter of increased interest rates and a slowing economy may be lurking. Despite Fed Chairman Bernanke's upbeat Valentine's Day testimony before Congress forecasting continued moderate economic growth and declining inflation rates, his predecessor Greenspan is less sanguine. His month-end comments that included a prediction of a slowdown in 2008 had immediate impact on Wall Street with the stock market indices dropping, indicating a tacit agreement with this more pessimistic outlook. Greenspan's opinion is shared also by some key economists. They too think that Bernanke's hope that interest rates will remain low for some time is overly optimistic.
Tax Crisis Deferred
February also brought a possible resolution to the so-called tax crisis that was threatening to stall the bull market later this year. Lurking fears that the Democratic-controlled Congress might repeal today’s lower tax rates for dividend and capital gains income - a cause of concern because Democrats are looking for ways to provide relief from the Alternative Minimum Tax (AMT) to middle-class taxpayers - were allayed by a new bipartisan initiative.
This new move, intended to close the gap between what we owe the tax man and what is actually collected, is designed to address the revenue lost to proposed AMT reform. The bipartisan proposal calls for brokerage firms to report the original cost basis for stock that you sell (currently individual tax payers furnish their own estimate of their capital gains). The Internal Revenue Service (IRS) thinks such a move would boost their coffers by as much as $10 billion. Having the IRS more involved in your investment records would be a significant trade-off in order to see AMT relief extended and dividend and capital-gains tax rates remain where they are. However, most investors recognize that the 2003 tax cuts are a key aspect of the economic growth we’ve seen, and they probably would be willing to give the IRS more clout to see their tax rates remain lower and economic growth continue.
For the moment, it appears that the bull market is set to continue for a while, but wise investors will be ready for possible changes spurred by global economic trends, inflation concerns and interest rate jitters.