In his first 100 days of presidency, Joe Biden did not just surpass his goals for US coronavirus vaccinations, he also enjoyed significant Wall Street gains, the likes of which have not seen since Dwight Eisenhower’s administration in the 1950s. The S&P 500 has gained 24.1% since Election Day in November 2020. The rise is substantially higher than the gains seen after Donald Trump was elected four years ago, when the index gained 11.4% in his first 100 days, despite Trump’s big money policies.
The US Congress has already earmarked over $3 trillion in stimulus, and the Federal Reserve has eased monetary policy to the loosest point in history. Taken together, these steps would naturally boost any stock market, but coupled with expected economic recovery, the gains have been even greater, and stock traders worldwide have continued to rejoice.
Tax Increases and Tech
While bulls expect the gains to continue as the recovery rolls on, bears warn that a significant snag could, quite literally, cap the gains. On Wednesday, President Biden is expected to propose raising individual taxes for the highest earners to 39.6% (a rate that is nearly double the current base rate), and to raise capital gains taxes for everyone earning over $1 million to as much as 43.4%. Biden also plans to raise corporate taxes a whopping 7%, from 21% to 28%, to help finance his infrastructure projects.
Historically, the S&P 500 posted gains 62% of the time in the year following a tax increase, but the gains have tended to be only a fraction of the index’s long-term annual return average of 7.7%. The second year after a tax increase has historically tended to have even worse results, with the index turning red 54% of the time.
Analysts warn that “big tech” names could see the steepest selloffs in advance of the capital gains increases. These stocks include Alphabet, Google, Apple, Facebook, Microsoft, Alibaba, and others. These stocks have skyrocketed in recent years, powered by the trend of the rising SaaS (software as a service) models, in which consumers and businesses purchase monthly plans for software rather than paying a one-time fee for endless use (think Microsoft Office Suite or Apple TV service). Semiconductor companies such as Intel and Cisco Systems have also benefited from this business model as their hardware is required to power these services.
It should also be noted that in the US, dividends are taxed as capital gains. So, while capital gains are only taxable once an asset is sold, dividend investors may feel the pain of a tax increase as well, which could cause investors to reallocate their assets and cause dividend stocks to fall as well.
What Does This Mean for Traders?
Traders may consider selling their assets before the tax hike takes effect, which can send stock prices indexes substantially lower. But the question remains – where will all these investors put this liquidated money? Municipal bonds could provide one alternative, but with a set income rate, bonds are not a sophisticated solution for aggressive investors. The stock markets remain one of the best places to see high returns over time, especially as companies continue to grow.
It is also important to consider that even if there is a tax hike, it will likely take several months to pass into law, and it can possibly be canceled or reduced if Biden fails to win re-election in 2024.
A wait-and-see approach is advised here, though some traders are likely to take profits in advance of tomorrow’s announcement, which may push markets lower. In the meanwhile, Dow and S&P 500 futures remain positive for Tuesday’s trading session, which is likely to provide excellent trading opportunities.