Thursday, December 2, 2010

Will there be a huge Stock Sell off in 2 weeks?

Failure by Congress to extend the Bush tax cuts, especially locking in the 15 percent capital gains tax rate, will spark a stock market sell off starting December 15 as investors move to lock in gains at a lower rate than the 20 percent it would jump to next year, warn analysts.

While it is unclear how bad the sell off could be, it could wipe out the year's gains, they warn, writes Paul Bedard Of US News

"Capital gains tax rate will increase from 15 to 20 percent if the tax cuts are not extended. The last time the capital gains tax rate increased--on Jan. 1, 1987 from 20 to 28 percent--investors realized their gains at the lower tax rate," said Daniel Clifton at a Washington partner at Strategas Research Partners. "We would expect a similar effect this time around as investors see the tax rate going up and choose to realize their gains and incur the 15 percent tax."

Lets Do the math... An investor made $100,000 so far this year. He sells off the stocks. He will have $85,000 in his pocket after taxes. If he waits just 4 weeks to sell it, he loses $5000. He would only have $80K after taxes. He would have to see his investment grow 6.25% in January to just break even with a sale today. If his capital grows to 106,250, he will walk away with $85K. Sounds like a no brainer to me.