It’s been a week of losses for stocks. Most of the debt can be traced back to a proposal by the Biden government to double capital gains tax on investments. It’s not official yet, but investors expect an announcement next week.
Before you hit the sell button for all of the huge capital gains you’ve accumulated over the past few years, you know the facts, and right now there aren’t any. What we do know is that Joe Biden ran his successful presidential campaign to raise taxes on the rich and on corporations. He plans to do just that, so it should come as no surprise to investors.
This proposal, if correct, would affect the top 0.3 percent of Americans. For those making $ 1 million a year or more, he wants to increase the tax rate on investment income from 20 percent to 39.6 percent. This is in addition to the 3.8 percent tax on investment income currently being financed by Obamacare.
When you add state taxes, the total tax on investment income is up to 52.22 percent for New Yorkers and even higher for California residents (56.7 percent).
That would clearly be a steep rise that would at least temporarily affect the entire stock market. Just think of the gains some of FANG stocks have made over the past few years. Many high-growth stocks are in the tech space, and wealthy investors may want to cash in on some of their chips if they truly believe that the capital gains proposition will soon be the law of the country.
Wall Street experts are concerned about downplaying the proposed tax risk for investors. The extent of the increase, they say, is simply an opening gambit, a trial balloon to be negotiated down, if it should happen at all. The slim majority of Democrats in Congress could make it impossible to force a change in capital gains tax. Nevertheless, the timing of a tax increase is also questionable. Would it be effective this year or next?
Market participants are also eagerly watching the global COVID-19 cases. Coronavirus cases are skyrocketing in countries like India and Japan. Here in the US, coronavirus cases increase in the spring.
Back in February, during the last spike, the US was recording an average of 65,686 new COVID-19 cases per day. Fast forward to today and we have an average of 64,814 new cases every day. Some states, like Michigan, are breaking all-time records in new cases.
You’d think doubling the number of Americans vaccinated would have at least reduced the number of new cases, but at best it just kept the new case level at around 65,000 per day. More worryingly, scientists at the A&M laboratory in Texas have discovered a new variant of COVID that is showing signs of antibody resistance and more severe illness in young people.
The contagious variants of COVID-19 that have become the dominant strains in the US appear to be the culprit in this case and with the high number of new cases, according to medical experts. The good news, however, is that the current government appears to be doing everything in its power to vaccinate more people, boost the economy, and build global trade and relationships.
As you can imagine, all of this news is affecting the financial markets. The three averages have pulled back a bit this week, but the real story lies in Bitcoin trading. I warned readers last Friday that cryptocurrencies (specifically Bitcoin) were ripe for correction.
On Saturday, Bitcoin fell 15 percent, and by the end of that week, Bitcoin was below $ 50,000. Other popular coins like Ethereum and Litecoin have also declined. Some analysts expect Bitcoin to decline as much as 50 percent (to $ 30,000) before the correction completes.
It seems that the dynamics in this room are stalling.
As I wrote, according to the Federal Reserve and other central banks, cryptocurrencies are considered speculative assets, not currencies. Investing in this area therefore involves risk, no matter how confident you are of long-term profitability. Only those with a strong stomach and stamina should be included in this room.
As for the equity markets, stocks are in a trading range despite a 1 to 2 percent decline. As we consolidate recent gains, I expect more daily rotations between sectors and asset classes. I still think stocks will continue to rise in the coming weeks, but so will volatility.