Insights & Advice

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Stocks hit with possible tax hike

It was a losing week for stocks. Most of the blame can be pinned on a proposal by the Biden Administration to double the capital gains tax on investments. It is not official yet, but investors are counting on an announcement next week.

Before you hit the sell button on all those huge capital gains you have accumulated over the last few years, know the facts. Right now, there aren’t any. What we do know is that Joe Biden ran his winning presidential campaign on increasing taxes on the rich and on corporations. He plans to do just that, so it should not be a surprise to investors.

This proposal, if true, would impact the top 0.3% of Americans. For those earning $1 million/year or more, he wants to increase the capital gains tax rate from 20% to 39.6%. That is on top of the 3.8% tax on investment income that presently funds Obamacare. If you add in state taxes, the overall capital gains tax would be as high as 52.22% for New Yorkers and even higher for California residents (56.7%).

That would clearly be a steep increase and one that would impact all the stock market, at least temporarily. Just think of the gains some have accrued in the FANG stocks over the past few years. Many high-growth stocks are in the technology space and wealthy investors may want to cash in some of their chips if they truly believe the capital gains proposal would soon be the law of the land.

Wall Street pundits, while concerned, are attempting to downplay the suggested tax risk to investors. The level of increase, they say, is simply an opening gambit, a trial balloon, meant to be negotiated downward, if it were to pass at all. The slim majority of Democrats in Congress might make it impossible to get any capital gains tax change to get through.  And, even so, the timing of any tax hike is also in question. Would it be effective this year or next?

Market participants are also anxiously watching the global COVID-19 case levels. Countries such as India and Japan are seeing coronavirus cases skyrocket. Here in the U.S., spring coronavirus cases are surging. Back in February, during the last surge, the U.S. was averaging 65,686 new COVID-19 cases a day. Fast forward to today, and we are averaging 64,814 new cases daily. Some states, like Michigan, are breaking all-time records in new cases.

You would think that doubling the number of vaccinated Americans would have at least made a dent in the rate of new cases, but at best, all it has done is kept the level of new cases at around 65,000/day. What may be even more concerning is that a new COVID variant has been detected by scientists at the Texas A&M lab that show signs of antibody resistance and more severe illness among young people.

The more contagious variants of COVID-19, which have become the dominant strains within the U.S., seem to be the culprit in this case and in the high level of new cases, according to medical experts. However, the good news is that the present administration seems to be doing all it can to get more people vaccinated, provide additional stimulus to the economy, and expand global trade and relations.

All this news, as you can imagine, is having an impact on the financial markets. The three averages have pulled back a little this week, but the real story is in the Bitcoin trade.  I warned readers last Friday, cryptocurrencies (Bitcoin specifically), were ripe for a correction. Saturday, Bitcoin dropped 15% and by the end of this week the price of Bitcoin was below $50,000.  Other popular coins such as Ethereum and Litecoin have also declined. Some analysts are expecting as much as a 50% pullback in Bitcoin (to $30,000) before the correction is over.

It does appear that momentum is stalling in this space. As I have written in the past, cryptocurrencies are considered speculative assets and not currencies, according to The U.S. Federal Reserve Bank, and other central banks. As such, investing in this area is fraught with risk, no matter how convinced you are in its viability in the long-term. Only those with a strong stomach and staying power should be involved in this space.

As for the equity markets, despite a 1-2% decline, stocks are in a trading range. As we consolidate recent gains, I expect continued daily rotations between sectors and asset classes. I still think stocks will continue higher in the weeks ahead, but so will volatility.

Any mention of specific securities or investments is for illustrative purposes only.  No representations are made that any of the securities discussed have been or will be profitable.

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