Here we are two weeks to year end. Before I can make any kind of prediction about the economy and the stock market in 2013 I need to know the results, if any, of the fiscal cliff battle that is going on in Washington. I do know enough to predict that whatever happens will, at worst, mean an immediate recession in 2013, or, at best, much slower growth. And that, to put it mildly, will not be good for the stock market.
If we do go off the cliff, taxes will go up by over $500 billion next year. To put that in context, take home for all who pay taxes grew about $300 billion this year to $6.6 trillion in aggregate. In other words, if we go off we will automatically be in a recession. A real world recession, ignoring GDP nonsense, is a year over year decline in after tax income.
My reading of the tea leaves says the Obama Administration will settle for a $140 billion per year tax hike. If a deal gets done reducing incomes by $140 billion, and then adding about $50 billion in new Obama care taxes, overall taxes will go up by around $200 billion. That is two words of this year’s gain in after tax income. The best deal I can imagine the Obama folk agreeing to is at least a $100 billion tax hike. Add Obama care that would be a $150 billion hit to after tax income.
To recap, at best US economic growth will slow by at least half the already current anemic pace and at worst, we go into recession. Unfortunately I see no way things better early next year. ...