The market rebounded on Tuesday, but way short of the losses it accumulated over the last several days.
Buyers were bargain hunting and may be rewarded down the line with decent gains for their moves. However, it is unlikely future gains will offset the capital losses, almost all of which will be reported on tax returns this year.
Flashback to Governor Brown’s aggressive revenue projections: about $4 billion in additional revenues were factored in the state’s budget based on robust capital gains related tax revenues from the prior year.
Can we expect the next several months to make up for the recent bludgeoning?
It’s unlikely given the combination of events occurring throughout the world – impending defaults in Southern Europe and Ireland, a slowdown in China designed to arrest an overheated economy.
If capital gains are flat, what about other tax revenue?
Growth in taxes on ordinary income, along with sales and property taxes, are likely to remain stagnant as long as unemployment remains high.
Even if the Chinese continue to spend, along with Brazil and India, the domestic unemployment picture is unlikely to improve. Even with strong corporate profits, layoffs are likely to persist as companies shift resources to growing foreign markets.
Stimulus spending does not instill consumer confidence, because many of the jobs created by infrastructure improvements – a major component of stimulus – don’t have legs to last beyond a couple of years. Shaky employment prospects do not encourage spending.
So, get ready for more cuts.