So much for the rally. US stocks ended flat after a choppy trading session yesterday, amid a sharp sell-off in HP shares (to a 10-year low) and renewed worries about Europe. The Fed chief’s reiteration of the threat and his repeating his assertion that the central bank does not have the tools to cushion a series of mandatory tax increases and spending cuts scheduled to go into effect early next year is a reminder once again that last night was a hope trade. Global bourses including Thai stocks will remain under pressure and trading will likely be jerky until an actual fiscal cliff is finalized.
Interesting stuff: Fear of higher dividend-tax rates in the US was one of the primary causes of the stock market’s weakness over the last month? You may doubt that, and it seems plausible as high-dividend-paying stocks presumably will be less charming on an after-tax basis if the rate were to go up. However, this argument is hard to square with history. There is no obvious correlation between the past changes in the dividend tax and the stock market’s performance (see pic). As such, it is difficult to argue that the changes will have a big negative impact on the stock market. What we know at this moment is only this could lead to an increase of special dividends before year-end in order to sidestep possibly higher tax rates, and that could help protect the downside of share prices through the end of this year.
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