What Investors are Really Thinking

The Consumer Confidence Index is up.  The real estate market is supposedly recovering.  People are buying as many cars as they were prior to the economic crash.  Forget the fiscal cliff.  Forget the new tax hikes.  Obama retained the White House and all is well with the world.

As my 12 year old daughter would say ….”Not…”.  While the media hopes to focus on the positive news regarding Christmas shopping and Black Friday giddiness, Spectrem Group Millionaire Corner research says that “all is not so”.  While the headlines focus on the lack of progress being achieved by the President and Congress regarding the fiscal cliff, the real Americans who will be the recipients of this foolishness are quietly cutting back on their holiday spending, reassessing their portfolios, talking to their accountants and tax attorneys and preparing themselves for a grim 2013.

Our research shows that 63 percent of investors do not think that Congress and the President will be able to avoid the fiscal cliff.  This concern is even greater (exceeding 80 percent) for business owners who fuel the economy.  Oh, yeah…I forgot.  President Obama believes that less than 2 percent of small businesses will be impacted by the tax increases.  Eighty four percent of the small businesses we surveyed said they believe their taxes will increase. (I guess Harvard Law School doesn’t teach their students about Subchapter S corporations and Limited Liability corporations. ) In fact, 85 percent of all of the investors we surveyed believe their taxes will increase.

Spectrem’s Affluent Investor Confidence Index and Millionaire Confidence Indexes plunged this month.  Unlike the average consumer, these households with $500,000 of investable assets or greater, understand that their lives are about to change.  A large percentage of these individuals are retired.  While their annual incomes may not subject them to tax, their decisions regarding raising cash on which to live will become increasingly important.  They will pay a much higher capital gains tax should they be forced to sell securities.  They can no longer live on the dividends from bonds because of the low interest rates.  The higher taxes will impact them for sure.  In fact, 85 percent of these retirees believe they will be subject to higher taxes.

Investors were especially concerned about the impact of the election and the fiscal cliff on their individual households.  Confidence in the economy fell almost 40 points in our Affluent Household Outlook component of the Index.  Company Health fell 28 points to a 5 year low.  Household Income and Assets also both fell.  What does this mean?  While investors aren’t yet certain that they might lose their jobs, many are worried that unemployment may once again increase and that they need to worry.  Most importantly, Millionaires were the most concerned about the economy.  This is a very dour outlook, and Millionaires are generally more positive than the merely affluent households.

How will these investors react to the upcoming tax increase?  Fifty eight percent will spend less.  That is especially true for those households with $100,000 to $500,000 of net worth.  Seventy five percent of these households will spend less.  These are the individuals who will be hit with the tax hike because they are deemed “millionaires” under the current definition of wealthy.  Most of these households are two income households, trying to pay for their children’s college education and to save for retirement.  They are working hard trying to achieve the American Dream.  Instead they are paying for everyone else’s.  These households are not eligible for financial aid.  They have 401k plans not union pensions.  They have trouble saving for retirement because they are paying tuition.  Most are highly educated professionals and small business owners who have worked hard to make their own way.

An increase in taxes may be OK for Warren Buffett who has billions of dollars.  But someone who makes a combined household income of $251,000 is not in the same league.  Thanks, Mr. Buffett, for showing so many Americans that the American Dream may not be worth the effort.  Better to sit home, make less and avoid taxes.