What You Should Be Scared Of In The Stock Market

Fiscal Cliff

Watch Out For The Fiscal Cliff

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.


Fiscal Cliff

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.


Increased Regulation

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?

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  1. says

    I believe that if there is no solution to the fiscal cliff the “smart” and “big” money will conduct a mad rush out of securities and into bonds (as bonds are tax free with less risk generally). My main goal will be to pick up great companies and great prices while being cautious not to try and catch a falling knife. If we do have a sell off in the market I would have to see a stabilization in the market before deploying any cash. As always this is what I think and only time will tell.

  2. says

    My own opinion is that the fiscal cliff is a good thing! I think the chances of those trying to negotiate a deal coming up with something that is going to cripple the economy long term are slim, but I think there will be a bit of volatility in the market over the next few months until things settle out. I see this as an excellent buying opportunity as stock prices are pushed artificially low.

  3. Brett Wilson says

    In my opinion the U.S. will face numerous challenges in 2013, but stock prices will still climb. However, the Chinese market could easily outperform the U.S. markets because the lagged behind the U.S. in 2012.

  4. says

    I’m excited about a downturn in the market, actually. I’m only fearful that the markets will continue to rise and I won’t have a chance to get my cash sitting on the sideline in play before it runs back up.

  5. says

    Yea, I can’t believe their going to raise the cap gains tax on us. One of the greatest parts of the American economy is how easily money flows to new and innovative ideas. Why put the breaks on our innovation engine? I’d sooner say cut spending…

  6. says

    The only thing that concerns me this year is the debt ceiling negotiations. Short-term market movement is too unpredictable to guess how markets will respond to the sequester negotiations, rising taxes, or other issues. The debt ceiling, however, has a decidedly catastrophic downside. I still doubt the U.S. will default, but if it does, we would face a probably financial panic. I may hedge client accounts to account for the worst case scenario on the debt ceiling.

    • says

      The US can’t really default because it can always print more money without borrowing. However, I think it will be a huge negative for the stock market. I almost think that the Congressional debate around it will be worse this time than before as well.

      • says

        You’re right about printing money. I particularly like the idea being floated right now that Treasury could mint a $1 trillion coin and deposit it. I’m not so sure the Executive will print our way out of this mess, however. I also like the idea of the President invoking the 14th amendment to get around Congress, but I doubt we’ll go that direction either.

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