New ATHs: A “Taxing” Week of Churn and Spike in Volatility

April 26, 2021

Weekly Market Update: 2021-04-26. The S&P 500 churned last week, starting with an early-week sell-off that was reversed on Wednesday. But those gains were given back in the span of one hour on Thursday. The cause: concerns about the Biden tax plan. And the market mostly recovered once again on Friday.

For the week, the S&P 500 closed with just a 0.1% loss, while the Dow and the Nasdaq fell 0.5% and 0.3%, respectively. On Friday, the Dow Jones Industrial Average gained almost 230 points. That is 0.7%, amid a jump in brokerage stocks, industrials and technology stocks. The S&P 500 rose 1.1% to 4,180 led by cyclicals and healthcare, while the technology-focused Nasdaq Composite climbed 1.4% to just over 14,000.

Biden Tax Hikes

With all other global stock markets closed on Thursday afternoon, news outlets reported that President Biden is slated to propose much higher capital gains taxes for the rich. Bloomberg News reported that he is planning a capital gains tax hike to as high as 43.4% for wealthy Americans.

Biden’s proposal would hike the capital gains rate to 39.6% for those earning $1 million or more, up from 20% currently, according to Bloomberg News. With Democrats’ narrow control in Congress, a tax bill like this faces big challenges. Many conservative Democrats are already balking at this “soak the rich and spend” socialism move, for example, Joe Manchin from West Virginia.

Biden tax impact on U.S. stock market

Moreover, according to UBS, U.S. taxable domestic investors own only about 25% of the U.S. stock market. Accounts that are not subject to capital gains taxes own the rest of the market. The impact on these accounts, such as retirement accounts, endowments and foreign investors, should be limited.

Outside of the domestic tax policy swirl, our friend to the north, Canada, was the first central bank in the world to put forth a “tapering” timeline. There are few major implications for equities when all is said and done. But it does heighten the likelihood that our own Federal Reserve will announce a change to its own bond buying program later this summer. My vote is for the late June meeting.

Bitcoin

Several highly respected CIOs (primarily bond managers) were out last week pontificating on how Bitcoin was heading to a “crash” back to the $20,000–25,000 level. I disagree with this call.

My take is that Bitcoin may be buyable at around $47,500–48,000. Note that this is not a recommendation to actually buy Bitcoin, but simply my thoughts on the volatile asset’s current pricing.

Upcoming Events

This is the peak-earnings week for the S&P 500, with almost 35% of the S&P 500 reporting their earnings this week. You will most likely be hearing the missive, “Sell in May and go away” across most TV financial channels in the very near future. While it is a catchy phrase, it is historically inaccurate as a timing tool.

A more historically accurate phrase might be, “Sell on Tax Day and go away,” as investors may not miss anything “net” over period after Tax Day. And it seems more likely the markets will experience a lot of frustrating ups and downs during the next 2–3 months into the July 4 weekend.

WEEK ENDING 4/23/2021 (CUMULATIVE TOTAL RETURNS)
Closing market index rates and yields

S&P performance after year to year peaks

Potential impact on stock market of increased Biden tax rates

Broadest strength since 2010 accompanies S&P's record setting advance

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