It appears that soon my worst fears from the summer and my worst current fears will be combined and as such, I am predicting Dow 5000.
In the summer, I worried about three things more than anything regarding then candidate Obama's policies as the affected the stock market. The three policies were raising the top marginal tax rate, raising the capital gains tax, and creating a new "regulatory framework". Raising the top marginal tax rate, on those making $250,000 and more, would have a very serious and adverse effect on the stock market. That's because folks almost always use some or all of their discretionary money to invest. That means that they use all or some of the money left after necessary expenses to invest. Of course, raising taxes on the hyper wealthy means that much of the money levied in extra taxes would be removed directly from the stock market. Capital gains taxes punish long term investment in such things as the stock market. Finally, hyper regulations create an environment that is very unfriendly to business.
More recently, I pointed out that President Obama's talking down of the economy, Secretary Geithner's terrible performance, as well as the President's government intervention policies have all lead to the downturn in the stock market. These dynamics appear to be in place. We can only hope that Secretary Geithner performs better going forward, however, the President seems determined to talk down the economy. Also, he is determined to create a quasi socialist state.
So, here is the score. Without implementing any of the things that I feared this summer, President Obama has already lead the market down nearly 10% since inauguration. Now, we have this bit of news.
To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes continued spending on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is lower than the nearly $190 billion budgeted for Iraq and Afghanistan last year.
Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.
As such, President Obama plans on raising taxes on the top income earners and he plans on raising capital gains taxes. As if his current policies haven't crushed the stock market enough, he is about to implement another set of policies that will be sure to crush the market even more. Make no mistake, hyper regulation is coming soon as well, at least in financial services and in energy.
It's absolutely stunning that the President has decided on this course. The current environment is corrosive on its own for the stock market. It will have a rough ride even under the most market friendly policies. Yet, the President has insisted on the most market unfriendly policies to combine with a very bad economic environment. Given what the President has proposed and will propose, I predict Dow 5000 prior to November 2010.