Wednesday, May 5, 2021
Let’s talk about higher taxes
President Biden is pushing for a corporate tax rate of 28% (from 21%) and higher ordinary income and capital gains taxes on the wealthy (making more than $1 million per year). Here are some things to know:
- Higher taxes shouldn’t be a surprise to anyone, as President Biden ran on this premise.
- Very few will be impacted by this, as only 0.32% of the population makes more than $1 million per year.
- With a 50/50 Senate and historically close House, the initial levels of tax rates will likely come down substantially.
- When looking at what stocks did after higher corporate taxes and capital gains taxes, it is clear there is very little correlation. In fact, if the economy is on firm footing, stocks do just fine.
- We will discuss this more in detail later today on the LPL Research blog, available at 12p.m. ET.
U.S. stocks open higher with the Nasdaq Composite leading following Tuesday’s underperformance
- Inflation fears amid supply shortages remain the dominant narrative in markets.
- European markets are surging on better than expected earnings, with the German DAX and United Kingdom FTSE 100 each rising over 1%.
- Asian stocks finished mixed as China, South Korea and Japan were closed for public holidays. Taiwan and Hong Kong finished lower on technology sector weakness.
Inflation to spur sooner than expected rate hikes?
- Comments from current Treasury Secretary and former Federal Reserve (Fed) Chair Janet Yellen suggested the Fed had the tools to combat any inflationary pressures stemming from President Biden’s stimulus proposals.
- Her comments led to pressure on the technology sector Tuesday, as higher interest rates may have an outsized effect on the higher-valuation sector.
- Investors aren’t expecting the Fed to raise its policy rate for at least another couple years, but a shift in tone from policy makers—even though Yellen no longer holds a position at the Fed—could have major implications for markets.
- We continue to believe inflationary pressures will prove transitory, though we could see higher than average inflation in the near-term as pent-up demand and supply shortages put pressure on prices.
Technology dragged markets sharply lower Tuesday, though the broad indexes bounced and managed to close near session highs. First support for the S&P 500 Index can be found at 4118, followed by 4000. Relative trends continue to favor cyclical value sectors such as financials, energy, materials and industrials, while technology is nearing one year relative lows vs. the S&P 500.
The United States reported 41,000 new COVID-19 cases on Tuesday, below the 7-day average of 48,000 (source: New York Times). The vaccination program continues to lead to lower hospitalizations, down 26% over the past 14 days.
- Over 40% of the adult population has now been fully vaccinated, and just shy of 70% of the population aged 65 or older have been fully vaccinated.
- The situation in Indian remains the primary COVID-19 story as the country has averaged nearly 400,000 new cases per day over the last seven days.
Time To Sell In May?
LPL Research notes some possible reasons for a pause in the rally and why any potential pullbacks won’t last very long. Learn more in this week’s Weekly Market Commentary.
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