Political Goals and Stock Market Reactions Following Biden’s Announcement According to The New York Times
Investors largely shrugged off President Biden’s proposal to raise taxes on investment income for wealthy Americans, while the stock market hovers near all-time highs after news of a strong economic rebound and earnings reports from tech giants like Apple and Amazon.
Indifference is well founded, analysts say – the NYT writes.
Biden wants to raise the income taxes that the country’s wealthiest households make from investments – called capital gains – to finance his economic recovery plans and infrastructure projects. The increase would apply to people with an annual income of one million dollars or more.
In theory, higher taxes on investments such as stocks should make them less attractive. But economic growth prospects and corporate profits are often a far more important factor in the decision to buy, sell, or hold a stock. And in a resilient market – when politicians typically propose them – higher taxes are even less of a deterrent.
“Markets can grow, and grow above the trend, even if the capital gains tax rate goes up,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets in New York. “It is not the silver bullet that will kill the bull market.”
Ms. Calvasina’s team observed what happens to the stock market when the capital gains tax rises. When the rate has increased in the past few years, the team found that the S&P 500 index has risen by around 11%.
The proposed capital gains tax hikes may cause momentary swings as investors try to block the appreciation on current investments, but the market usually recovers its position and the shares rise higher.
“Any potential stock sales will be short-lived and reversed in subsequent quarters,” analysts at Goldman Sachs wrote late last year about the prospect of a Democratic-controlled capital gains tax hike in Washington.
This appears to be the way the market is behaving. News on April 22 that the Biden administration was considering raising the tax sent the shares into red, but the sale was limited. Stocks were down just 0.9% for the day and rebounded the next day.
Even after a 0.7% drop on Friday, the market is sitting on a comfortable gain of over 11% this year. The S&P 500 was up 5.2% in April, its best month in 2021.
Investor stoicism may also reflect the fact that Biden’s plan requires congressional approval, where there is subtle democratic scrutiny of both houses. This reduces the likelihood that the proposed increase – which would tax ordinary income and capital gains in the richest households at the same rate of 39.6% – will be implemented in its entirety.
If the shares continued their rise, it would be largely in line with previous periods in which capital gains taxes were raised.
In 2013, when the tax rose to the current 23.8%, from 15%, on Americans with the highest incomes, the S&P 500 went up nearly 30%. It has been the best year for equities in the past two decades. And after the maximum rate rises to 28%, from 20%, at the end of 1986, the market continues to rise by almost 40% for most of 1987.
Stocks eventually suffered their worst single-day crash on Black Monday in October 1987, but that crash had little to do with fiscal policy, and the markets finished the year slightly higher. In 1991, a small 28.9% increase in the capital gains rate for those with the highest incomes coincided with a 26% increase in the S&P 500. The main driver of that gain had nothing to do with taxes; it was the emergence of a recession.
Likewise, investors appear to be focusing on proof that the economy is on the verge of dizzying growth. This surge is fueled by a torrent of federal government spending, low interest rates and more Covid-19 vaccinations. In the first three months of the year, the economy grew at an annualized rate of 6.4%. At this rate, 2021 would be the best year of growth since 1984.
Economic growth and corporate profits tend to soar together. And signs of further economic push are already showing in the earnings reports of publicly traded companies.
Tech giants like Tesla, Microsoft, Amazon, Apple and Google’s parent company Alphabet all reported first-quarter profits that exceeded analysts’ expectations.
Now Wall Street analysts are upping those profit forecasts even further, expecting the earnings of the S&P 500 companies to soar more than 30% this year. At the beginning of the year, the forecast was a little over 20%. If expected corporate profits show up, it will be their biggest rebound in over a decade.
Such growing optimism about profits – traditionally seen as the key driver of stock prices – should far outweigh any impact of a tax hike, investors said.
Tax increases are not “the main event,” said Saira Malik, head of investment at Nuveen’s global equity division, a large wealth manager. “The main event, for us, is the growth in earnings. Earnings growth, if you look, is what drives bull markets ”.
(Extract from the Epr press review)
