The first test was of the hypothesis that the stock market effectively discounts future news.
Since the election of Barack Obama it has been clear that January 1 constituted a significant date for the stock market. The fiscal cliff would have meant a serious and almost certain recession.
The price of the stock market should have reflected the anxiety about the fiscal cliff and after the cliff issue was largely resolved the stock market should again have reflected the relief from the uncertainty.
We now know that the stock market does not discount future news. It showed virtually no change before January 1. There was no greater volatility there was no greater upward or downward movement than for the previous 9 1/2 months. After the January 1 fiscal cliff issue was resolved the market only went up a few percentage points.
The stock market does not discount future news.
We are now living in the second test.
United States has dramatically increased the taxes on dividends and capital gains. Dramatically. This should result in a change of investment behavior in the United States. There should be a decline of some types of investment and a movement to other types of investments. We shall see.
There was also an increase in the income tax rates. It will be harder to determine the extent of this effect on our society but it is also a test and we shall see the effects over a few years, particularly in states where the federal rate is added on to a high state rate.
Fun? Not if you have to pay more taxes and can’t figure out how to avoid it.