Stocks dove Thursday on a report that President Joe Biden will propose a hefty increase in capital-gains taxes.
Dow Jones Industrial Average
fell 321.41 points, or 0.94%, to close at 33,815.90. The
dropped 38.44 points, or 0.92%, to end at 4,134.98, and the
tumbled 131.81 points, or 0.94%, to close at 13,818.41. The biggest gainer in the S&P 500 was credit-reporting agency
(ticker: EFX), which saw shares rose 14.94% after beating earnings estimates.
According to an anonymous report Biden administration will propose to increase the tax rate for the richest Americans to 39.6%, from 37%, while raising the capital-gains tax on people earning more than $1 million to 39.6%, from 20%. Higher capital-gains taxes lower the after-tax return on stock sales, thereby making them a less-appealing investment. Fortunately history shows changes in capital-gains taxes have minimal correlation to stock-market returns; other forces, like changes in the economy and interest rates, are always at play. Still, a higher tax on capital gains isn’t a positive, and investors were not encouraged to hear the news Thursday.
Stocks were posting moderate losses—and were flat at times—until the report hit the tape around 1 p.m. ET, sending the S&P 500 to its intraday low from the intraday high.
Importantly, stocks were having trouble gaining traction even before the tax news. Not even a better-than-expected data in initial jobless claims provided much lift. There were a pandemic-low 547,000 unemployment claims in the past week, less than the expected 603,000, and an improvement from last week’s reading of 586,000. States are reopening and trillions of fiscal stimulus dollars have provided small businesses with the cash to rehire workers. But with the S&P 500 up just under 10% year to date, the rally is in need of a pause, according to some observers.
“The positive read on jobless claims along with a pretty solid earnings season thus far could provide some tailwinds for the market,” wrote Mike Loewengart, managing director of investment strategy at E*Trade, in emailed remarks to the press. “Keep in mind though that stock prices are quite elevated, suggesting that the upside is already priced in.”
Keep watching the recovery and policy changes, and keep in mind that stocks are currently pricey.
Write to Jacob Sonenshine at [email protected]