Hi Beavis, maybe this article will help clarify it for you.
Budget Accord Could Offer Investors Stock Incentive
7.09 p.m. EDT (2309 GMT) July 29, 1997
By Patricia Lamiell,ÿ Associated Press
NEW YORK The new budget agreement on Capitol Hill could throw fuel on an already incendiary stock market by giving people another reason as if they needed one to invest.
The legislation would cut capital gains taxes, making long-term stock market gains worth more. It would also make Individual Retirement Accounts more attractive by allowing investors to use them for first-time home purchases and college education costs.
"It is wildly bullish," Peter Canelo, an investment strategist at Morgan Stanley Dean Witter, said of the tax and budget-balancing deal struck Monday between President Clinton and Republican congressional leaders.
The agreement would cut capital gains taxes, which are paid on profits from the sale of stocks, bonds and other investments. Capital gains rates for the wealthiest investors would drop from a maximum of 28 percent to 20 percent, and from 15 percent to 10 percent for the lowest income bracket. The tax cut would be retroactive to May 7, 1997.
This actually could be a signal for investors to lock in some of their paper profits by selling stocks that have risen sharply during the past few years.
"I have not taken capital gains for six years," said William Chatlos, a retired corporate consultant in North Caldwell, N.J. "It is clear that I and millions of others like me will use this opportunity to free up enormous amounts of capital. The market could take a temporary short-term pounding by people selling."
But eventually that money will find its way back to the stock market, Chatlos said.
Canelo agreed that a sell-off, if it does happen, will be short-lived. He noted that the stock market did decline in October 1978 when Congress cut capital gains taxes, but that was because the Federal Reserve also raised interest rates.
Stocks also tumbled after a 1981 tax cut, but that was when long-term bond yields were above 15 percent and thus a worthy alternative investment, Canelo said. That can hardly be said for the 30-year Treasury bond now, which is currently yielding well below 7 percent.
Another provision of the package would allow investors who earn $150,000 or less to make tax-free withdrawals from IRAs to buy a house for the first time, or for college expenses.
The plan also calls for a $400-per-child tax credit beginning next year that rises to $500 in 1999, for children 16 and under. Employers could adjust withholding at the beginning of next year, which would increase employees' take-home pay.
But investors are not inclined to invest those extra few dollars a month in stocks, said William Dodge, portfolio manager at Marvin & Palmer Associates Inc. of Wilmington, Del. The families most affected by this credit, those earning $75,000 or less per year, are less likely to save than to spend, Dodge said.
Instead, the extra money will probably be spent on things like clothing, or will be put toward big-ticket items like appliances. As such, it will prove an extra shot of adrenaline to an already robust economy.
The child credit will "very likely to help retail sales and may provide marginal benefit to retail stocks," Dodge said. "Its primary effect is going to be felt in consumer spending."
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I'm sure IBD will have something in much more detail tommorrow.
Regards, Michael |
