A payroll tax increase of 2 percentage points has hit workers who have received their first paychecks of the year, and has many determining how they will cut back in 2013.
There are two reasons for this increase: 1) Keynesian economic theory says tax cuts should be timely, temporary, and targeted. These tax cuts lasted two years so that makes them temporary; 2) politicians want the tax revenue to put into the virtual Social Security Trust Fund.
Peter Morici writes:
Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.
In March 2000, the S&P 500 first closed above 1500. Since corporate profits are up 135 percent but stocks have made virtually no gain since over the last thirteen years.
Buying stocks does not seem to pay any more, because most of the increased value created by higher profits has been captured by hedge funds, electronic traders, private equity funds, aggressive M&A shops, and trading desks at investment banks, which have multiplied over the last two decades.
. . .
The ordinary investor is simply out gunned. For him stocks have become a rigged game.
Disagree. The reality is that the stock market, as represented by the S&P 500 Index, has been in a secular (long-term) bear market since March, 2000 because stocks became severely overvalued in the 1990’s. Stocks went up so high investors could not justify the reward for the risk. 2000 was the apex. They are overvalued based on various measures such as the price-to-earnings (P/E) ratio. When stock valuations get too high stocks become too risky to hold for long periods. Value investors demand a Margin of Safety to compensate for the risks of investing in them. During the timeframe from March, 2000 through today the stock market has traded in a broad range, and it has traversed this range up-and-down several times. These traverses are cyclical bull and bear movements within the secular bear market, just as the stock market goes up and down during secular bull markets. This is the nature of markets; a new secular bull market will emerge — sometime.
Another mistake Mr. Morici makes is conflating business cycles (“last two business cycles”) with stock market cycles. They are not the same and they do not move in tandem. The business cycle is directly related to the economy but the stock market cycle is not. As I explained above the stock market is overvalued in the view of many investors. March, 2009 saw a severe drop in the stock market, and that was the best time since March, 2000 to get invested. It remains to be seen if that was the beginning of a new secular bull market. Valuations did not hit the extreme levels in the beginning of 2009 normally associated with new secular bull markets so we’ll see.