Medicare Agent News: CEOs Talk Inflation

Thursday, April 22, 2021

CEOs Talk Inflation

By Nicholas Jasinski | Thursday, April 22

Two Certainties. Stocks dropped like a rock around 1 p.m. Eastern time today after news crossed the wires about a potential proposal from the White House to increase the capital gains tax rate on high earners. It could come as part of President Joe Biden's upcoming American Family Plan, a second bill focused on education, childcare, and work programs to follow the American Jobs Plan infrastructure package.

According to the New York Times and Bloomberg, Biden plans to propose increasing the capital gains rate to 39.6%, from 20%, for those who earn at least $1 million a year.

Wall Street didn't like the sound of that one bit, and the major stock indexes plunged from near their highs of the day. By the close, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite had all lost 0.9%. All 11 S&P 500 sectors declined, led lower by materials' 1.7% loss. Real estate and healthcare were the best off, down just 0.4% and 0.5%, respectively.

Those subject to a higher capital gains tax would certainly be motivated to lock in their profits before the year when the new rate takes effect. But deciding to do so today based on a pair of anonymously sourced reports about a to-be-released proposal for draft legislation seems to be a premature move.

“Wall Street hit the panic button and headed for the sidelines after reports that President Biden will propose capital-gains taxes as high as 43.4% for those making over $1M per year,” wrote Oanda’s Edward Moya today. “Some traders are looking for an excuse to lock in profits and they might choose to use this tax story as their catalyst.”

On top of that, the relationships between personal tax rates and stock market returns or economic growth are far from concrete. The devil will of course be in the details of the tax legislation. And much will also depend on how the government spends the revenue generated from those higher taxes.

Here's Michael Darda, chief economist at MKM Partners, writing before today's news:

Although there is no direct linkage between tax rates and productivity cycles, we would have to assume that all other things equal (they never are) these would be a headwind. A good example of all things equal not applying was the 2017 Trump tax cuts which were offset by a Trade War (contractionary) and a Fed that likely tightened more than otherwise would have been the case (had deficits not begun to rise against the foliage of a healthy labor market). At least when it comes to stock market valuations, higher tax rates, higher inflation rates, and higher market interest rates could become a serious fly in the ointment.

Barron's Ben Levisohn has more on today's tax-fear induced selloff.