Written by Dave Young, President of Paragon Wealth Management
The financial world was about to go over the fiscal cliff. Our world was ending as we know it. But then, our trusty politicians came back to save us. At the very last minute, they came to an agreement. President Obama even came back from his vacation in Hawaii to be there.
Everyone cheered. The stock market jumped 300 points the next day.
We followed our models and our portfolios performed well through all of the stress and uncertainty.
So what really happened?
Not much. Payroll taxes were put back to what they were before the payroll tax holiday - which will cost average wage earners somewhere between $500 and $2000 per year, depending on your income.
Of course, the rich, who are regularly told don't pay their fair share, were mandated to pay more. Their top marginal rate was increased from 35% to 39.6%. I guess they can feel grateful that their tax didn't go up to 40%, just 39.6%. It's kind of like when they price gas at nine tenths of a cent so you feel better about it.
The definition of rich was changed again. For at least the next few months, single rich people earn $400,000 and married rich people earn $450,000. I guess it's important to define who is "rich" so that we know who should pay everyone else's bills.
The estate tax exemption was set at $5,000,000 per person. That was relatively positive because for the first time in a decade there will be some certainty around estate planning. Unfortunately, for planning purposes, it's nice to know how much more the government will take when you die...
At the end of the day, nothing has really changed. We are still 16+ Trillion in debt and going further into debt every day. There were virtually no cuts made to government spending in this agreement. Forty two cents of every dollar that the federal government spends is still borrowed from your kid's and grandkid's future.
So, for now - until the next politically induced crisis - we should have some stability in the market. That crisis will be the debt ceiling debate. It should occur between now and March.
The fundamentals of the market actually look fairly positive for 2013. Based on our models and the economic trends, I am positive on the economy and the market for the next couple of years. The issue is whether or not our leaders will continue to create unnecessary uncertainty.
In summary, over the short term, market conditions look good. Over the long term, I have some serious concerns. Based on current policy, our 16 Trillion dollar debt isn't going to magically disappear. At sometime in the future it will have to be addressed. If it isn't then we will experience a real cliff. That is the one that we will be watching out for.