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Stocks retreat on capital gains plan

April 23, 2021

changes in the S&P 500 around increases in the maximum capital gains tax rate chart

Source: Standard and Poor’s and U.S. Treasury

Equities pulled back yesterday after President Biden’s plans to increase the maximum capital gains tax rate were leaked. The proposal would lift the long-term rate from 20.0 percent to 39.6 percent for those with incomes in excess of $1 million and would mark the largest increase since the tax was introduced more than a century ago. Congressional approval is far from assured, of course, given the evenly divided Senate, and it should also be stressed that the historical relationship between capital gains rates and market performance is shaky at best. There has been little correlation between either maximum or average capital gains tax rates and changes in the S&P 500 on a year-to-year basis, for example, and the market has actually turned in above-trend increases during periods in which the top duty has been lifted. That said, the relationship between tax rates and returns does strengthen a bit over longer-term time frames, so this proposal would represent a modest structural headwind, and it will, at the margin, add to a building narrative (inflation risks, a lingering pandemic, etc.) that has the potential to drive the correction that often takes hold in the second year of the cycle anyway. More sustainably, however, higher capital gains tax rates at the upper end of the income spectrum will do little to derail a market that should continue to be boosted by an ultra-supportive monetary policy stance and solid economic growth for several years to come. The headwinds in this cycle are slowly beginning to gather, but they are still dwarfed by the overwhelming tailwinds.

Claims fall again

New claims for unemployment insurance were lower than expected last week, falling by 39,000 to 547,000. This is the second large drop in a row and at least temporarily breaks the pattern that has taken hold this year of partial retracements immediately after outsized declines. The four-week moving average fell to 651,000, down more than 100,000 from the payroll survey week in March to suggest another big gain in employment this month. Prior to last year, there were only two other cases in the more than five-decade history of the data series in which claims fell by at least this much on a month-to-month basis, both of which coincided with booming job growth (+403,000 in March 1977 and +371,000 in July 1994). The labor market looks very much to be gathering steam and is well set up to the predominant engine of this expansion for the remainder its duration.

Daily Trivia

What famed movie quote was drawn from Ivan Boesky’s commencement address at UC Berkeley in 1986?

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Who made his acting debut in Star Trek Beyond, less than two years after his firm released a product inspired by the Starship Enterprise’s on-board computer?


Jeff Bezos


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