It's almost 2013, and there are potentially a lot of changes happening in the economy, in government, and as a result, in the stock market. I'm not trying to be a doomsday predictor, but I do believe that you should be scared of a few things, and plan accordingly. Remember, there are no unexpected expenses, and investing in the stock market is no different – you just need to plan ahead.
Here are some things that scare me in the current stock market for 2013.
Sorry, I had to mention this here, because several of the potential implications of the fiscal cliff will hit investors, like myself, very hard. While the market as a whole will likely tumble if the cliff isn't fixed, it is some of the more specific implications of the fiscal cliff that scare me.
First, the higher tax on dividends is particularly concerning. Being a big-time dividend investor, I'd really hate to see the taxes I pay on dividends rise from their current rate of 15% to 32%. This is a huge potential increase in taxes that all investors should be scared of.
Second, the increase in long term capital gains rate is another area of concern that should worry investors. Once again, higher taxes on investing returns can really put a damper on your investing.
Solution: My solution is to focus more on my tax deferred accounts, like my Roth IRA. The trouble is that you can only contribute so much each year to it, but any tax savings is a positive.
Every year, January 1 brings with it new regulations that companies will have to comply with. In California, and as a result, a possible trickle-down effect across the country, the new cap-and-trade carbon dioxide emission regulation is slated to take effect. This will impose a lot of new taxes on manufacturing companies and others that emit CO2. While this may benefit the environment, the potential cost is huge – especially for industries that cannot easily move to other locations – due to access to water, the border, farmland, etc.
As a result, many industries will face higher costs to do business in 2013 compared to past years. This could have a negative effect on profits, which in turn will lower stock market returns.
Solution: Look at companies that will not be negatively impacted by the changes in regulation.
Lower Consumer Spending
My final area of fear is consumer spending. I think this holiday season will show flat increases in consumer spending, which does not bode well for 2013. I think there will be continued unwinding in the consumer credit market, which will man lower spending. I also think that if the fiscal cliff is crossed, and payroll and other taxes increase, the consumer will naturally spend less because they will have less in their pocket.
Since consumer spending makes up such a large portion of the economy, this is a very bad thing.
Solution: Look at non-cyclical consumer staples like diapers and other necessities that could ride out any potential recession or decrease in consumer spending.
What scares you in the stock market in 2013?