Capital Gains Tax Rate Increase Sink Stocks

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In his Daily Market Notes report to investors, while commenting on the increase in tax rate sinking stocks, Louis Navellier wrote:

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Q1 2021 hedge fund letters, conferences and more

Stocks Sink Due To The Increase In Capital Gains Tax Rate

The proposed long-term capital gains tax rate increase from 20% to 39.6% on taxpayers with incomes in excess of $1 million per year sunk stocks today.  Another proposal is to raise the tax basis on estates, by using a “stepped up basis” versus the cost basis of the asset.  Frankly, I suspect that these proposed tax increases will be knocked down at the hands of Senator Manchin who remains the “swing” vote in the Senate.  Ultimately, his input will likely determine the tax rates that pass the Senate.

As I have said previously, it is imperative that the long-term capital gains and qualified dividend tax rates remain the same, since they are both taxed on corporate level and then “double taxed” on the individual level.  If the long-term capital gains tax rate is raised above the qualified dividend tax rate, then Corporate America will just raise their dividends, so insiders can take money out of the corporation at a more favorable tax rate.  As a result, I expect that the Biden Administration’s proposed long-term capital gain tax increase to 39.6% will fail.  A more modest proposal to raise long-term capital gains and qualified dividend tax rates from 20% to 28%, would be much more likely to pass the Senate.  However, everything remains in Senator Joe Manchin’s hands, since he is now the most powerful person in the Senate.

Initial jobless claims; 547,000 vs 603,000 estimate, a new post Covid low and hard evidence that the re-opening is marching forward . . .  with it comes other considerations, especially the dynamics of workers returning to the office.  It involves strong arming employees to get vaccinated, the market values of historically high value commercial office space, the amount of space an office worker should have to stay healthy, whether part time office/ part time home options are practical, the ability to work from anywhere that younger workers seem to prefer. How this unfolds will have lasting effects on society for years to come.

Hot Economic Data

With the plethora of hot inflationary data that crossed the tape over the past few days, the dip in the 10-year yield caught bond traders completely off guard. The economic calendar served up data that should have had bond vigilantes foaming at the mouth:  The total Consumer Price Index (CPI) increased 0.6% month-over-month in March . . . March retail sales soared 9.8% m/m (consensus 5.3%) . . . Housing starts surged 19.4% m/m  . . . The Empire State Manufacturing Survey rose to 26.3 in April . . . The Philadelphia Fed Survey rose to 50.2

Inflation shocks will continue over the next year. Be prepared for tax increases and price increases. There is no free lunch for government over-spending, but if we are very careful, we might avoid serious fallout . . . If interest rates – both short-term and long-term – stay low (say, below 3%, long-term) . . . If most Americans don’t become manic buyers of consumer goods, bidding prices up too fast  . . . If any tax increases are limited in scope and target their goal toward pro-growth measures . . . Perhaps we can escape serious market setbacks or morning-after debt hangovers. That’s a lot of ifs.

The March rotational correction in the Nasdaq is now over and the tech sector has mostly recovered, but the timeless question of which is better – Growth vs. Value – keeps popping up again and again.

We have seen growth underperform value many times in the past 10 years and, each time, the growth sector rallied and made further progress. This time may be no different.

To me, the question is not whether growth or value is better, because I think it’s neither. I think value is outperforming now because the value sector got decimated by the COVID shutdowns and we are seeing the reversal of that effect with the economic reopening.

Growth Companies See A Boost In Business

On the other hand, many growth companies – anything that makes business digital and moves it online – saw a boost in business from the COVID shutdowns and some of those stocks got ahead of themselves, despite seeing booming businesses. That does not mean those companies are dead and buried, but that their booming businesses need to catch up with their share prices, which may take some time.

The new Mercedes EQC could be a game changer due to its 478-mile EV range and a host of luxury features. The EQC automatically uses regenerative braking as it approaches traffic circles and automatically scans the road ahead to be safe and efficient. The quality of the EQC interior, with a massive OLED and LED integrated screen encompassing both the driver and passenger, as well as the center console, is getting rave reviews. Until VW Group unveils its Artimus project, code-named “land jet,” in 2025, as a new Audi, Bentley and Porsche model, it appears the Mercedes EQC will be the most futuristic luxury EV with a long range. Although Tesla had record sales in the first-quarter, EV competition is rising fast, so Tesla is expected to continue losing market share to new competitors.