Stock Market: Combine Holiday Cheer with Year-End Tax Savvy

Wall Street enjoyed a November rally and hopes for an end-of-year upswing remained high - especially when the Federal Reserve’s Open Market Committee hinted that the Fed’s rate hikes might be ending in the next few months. Investors were happy with the inference that monetary policy-makers plan to remain sensitive to the role higher interest rates might play in slowing the economy. However, the Fed also hedged its bets, expressing concern that inflation, triggered by possible energy price increases in 2006 might necessitate more rate hikes. For the moment, Wall Street chose to shrug off oil price and inflation worries and focus on the positive.

Though 2005 has been a year of worldwide turmoil, with an increase in terrorist attacks against American and British interests, the market has remained steady. This may have been a lackluster year for investors - by the end of November all major indices were about were they were when the year began - but considering the geopolitical climate, the impact of oil price hikes, and the damage inflicted on the U.S. by major hurricanes, perhaps this unexciting performance represents a better-than-expected result. Most investors are gratified to see 2005 end on an upswing - even a modest one. Investors hope that oil prices won’t escalate during the winter heating season and trigger new inflation concerns and more interest rate hikes. Holiday spending looks as if it might be better than first predicted - according to the National Retail Federation - which would further strengthen the year-end rally.

When it comes to 2006, the bulls believe stocks remain undervalued, with stock prices failing to reflect solid corporate earnings. They see potential for 2005’s mini rally to continue into the New Year. Other Wall Street experts are less optimistic, and some are especially concerned about the impact of a new tax bill (approved by the Senate in mid-November) designed to impose $5 billion in new taxes on the oil industry over the next two years. Critics believe these new taxes can only spur more price increase and cripple efforts to step up energy exploration efforts. Though final details still have to be determined, many Wall Street gurus are hoping that this new bill will be radically revised to remove these new taxes.

Tax-Loss Selling
As you enjoy the year-end rally, don’t forget to take a hard look at your own portfolio. Year-end is the time to rebalance your stock holdings, and to shelter your gains with losses. Sit down with your professional tax advisor to discuss how best to leverage your losses and gains. Taxes on capital gains may have decreased to 15 percent, but tax-loss selling will still save you money.

Perhaps it's time to take some profits, or to use your gains to generate additional tax benefits. Charitable donations are fully deductible against personal income tax (except for those taxpayers who fall into the alternative minimum tax category). Find time in the next few weeks of holiday festivities to make sure you enlist your tax professional’s help to identify every year-end tax advantage that’s available to you.

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