The Markets

It was another quiet week for the markets as all eyes focused on the coming weeks events.

Tuesday's election results will be interesting as investors will closely watch for any shift of power in Congress. Republicans are expected to gain enough seats in the House to filibuster against an major legislation that will increase taxes or government spending. Gaining control of the senate is another matter. One of the major items on congress' agenda will be tackling the Bush tax cuts due to expire at the end of 2010.

There is some consensus to keep the tax cuts in place for some taxpayers while letting them expire for others. My concern with this thinking is that it punishes many small business owners who, without much if any help from the government, have willingly taken on risks to live the American dram by building a viable business enterprise. By reaching some level of success, their taxes could be raised by a disproportionate amount.

Taxpayers who earn more, pay more in taxes simply by having the tax rate applied to a larger taxable income figure. An article in a recent Investment News quoting IRS data found that the top 1% of tax returns in 2007 were responsible for over 40% of all federal individual income taxes paid. The top 0.1% of tax returns (one-tenth of one percent) accounted for nearly 20% of the nation's federal income taxes paid. Taxing this group by increasing higher income tax brackets seems counter-intuitive to a free-market economy.

Another event the markets will be keeping a keen eye on will be the announcement by the Fed about their intent on what's been called QE2. Quantitative Easing, the second round, is set to begin soon as the Fed attempts to further stimulate the economy by purchasing large amounts of Treasuries.

The Fed walks a fine line between making too little or too much in Treasury purchases. If the Fed buys only about $100 billion, the markets may take the effort as too little to be effective. On the other hand, if the Fed buys over $500 billion, it may result in stoking inflation fears beyond their control. The negative effect would be stagflation; a stagnant economy with long term rates rising.