In the days immediately following President Barack Obama’s victory over former Massachusetts Gov. Mitt Romney, U.S. stocks experienced a sharp and sudden downturn.
Why?
Some believe the selloff was caused by the so-called "fiscal cliff,” a combination of tax increases and across-the-board spending cuts that will go into effect next year unless Congress comes up with a budget plan. But Wharton finance professor Jeremy Siegel has a more specific explanation: Investors are dumping their holdings in preparation for next year's scheduled capital gains tax hike.
And it makes sense. Sell now while the rates are low.
“I think a lot of people with capital gains have been locked in saying ‘I’m going to take them under 15 percent instead of 23.8 percent,’” said Siegel during an interview on CNBC’s “Squawk Box.”
Capital gains tax rates are scheduled to go up to 20 percent next year, up from its current rate of 15 percent.
“I actually think that the issue of taxes and locking in lower rates right now is more reason for why the market went down than the cliff itself,” the noted economist explained.
Siegel is also confident the U.S. economy will see an acceleration in economic growth next year. The cliff, he argues, will cause a sharp and short-lived recession but that it won't lead to long-term downturn.
“I think even if a tax deal is delayed, it will be retroactive to January 1 and sequestration isn't going to happen to anywhere near the degree” people fear, Siegel said. “I think there will be a short term compromise on the rates, and then a reconvening of Simpson-Bowles to get the long term solutions right for this country.”
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