Stock Market Losses Will Mount As Investor's Plan For Obama Tax Increase!

In the week leading up to the election, many analysts on Wall Street believed that an Obama Presidency had been factored into the stock market during the month of October. Although the market was expecting an Obama victory, large segments of the marketplace were still hopeful that the expectation would not come to fruition. As a result, the markets primarily reacted to economic news and few investors planned for the full effects of an Obama presidency.

The last two days since the election have seen a 10% drop in the US stock markets based partially upon a bad retail sales report, but despite a 1.5 point drop in British interest rates. Although retail sales fell, there was no injection of news that was entirely unexpected that would cause such a drop to occur. The fact is that investors have now realized the reality of an Obama presidency and now we all must be prepared for the massive sell off that is likely to occur before the end of the year.

Why would an Obama Victory lead to a massive sell-off?

Simply put, the fear that he and a Democratic Congress will push through tax increases next year.

Wealthier Investors have dissected Obama's tax plans and as the year ends, smaller investors will also begin to realize the reality of Obama's plans. If Obama were to push through his tax plan next year, he would institute an higher capital gains rate and an increase in the top tax brackets. As a result, investors will act before the end of this year to sell off investments that have generated both long-term and short-term capital gains in order to reduce their tax burden. There is, of course, the possibility that Obama would put his damaging tax increases on hold; however, that is a risk that investors are unlikely to take and if they were to wait they could see capital gains rates as much as 50% higher.

So brace yourself, as at this point a traditionally inactive November and traditionally positive December are likely to see nontraditionally high levels of volatility and a continued sell-off. From now until the end of the year, the market is in full Obama preparation mode and any negative economic news will only compound the sell-off.

J Brown
November 7th, 2008