Capital Gains Tax Proposal From Biden Causes Markets to Sputter

As the White House mulls a proposal that could nearly double the capital gains tax rate, the rally on Wall Street has petered out.

American flags hang outside of the New York Stock Exchange on Feb. 16, 2021. (AP Photo/Frank Franklin II)

MANHATTAN (CN) — Multiple weeks of record-setting highs gave way this week after markets pulled back in response to the White House’s suggestion it could up the capital gains tax on investors.

Several news outlets have reported that President Biden is planning to raise taxes on Americans making more than $1 million to help fund child care, educational and health care programs. As it currently stands, the proposal would also increase the capital gains tax rate from 23% to 43.4%, much to the chagrin of Wall Street.

After news of the tax plan broke on Thursday, markets reversed and dropped some value. The fall “makes sense as it would hit multiple parts of the market as investors proactively booked gains this year ahead of any potential tax increases,” wrote Tom Essaye of the Sevens Report in an investor’s note.  

“Broadly speaking, as the focus in Washington shifts from stimulus (which was easy) to infrastructure and social agendas, we and others warned that the headlines would become much more mixed for markets — and that’s what we’re seeing right now,” he wrote.

By Friday’s closing bell, the Dow Jones Industrial Average had lost 157 points for the week, though it had been down much more than that at one point. The S&P 500 and Nasdaq had similar trajectories, falling 5 and 36 points, respectively.

Most companies are now reporting they’ve recouped the demand lost since the pandemic began. In its earnings release, Coca-Cola said its global unit case volume last month is the same as 2019 levels. The beverage company’s net revenues increased 5% since last quarter, despite the continued declined in its fountain business.

“We are encouraged by improvements in our business, especially in markets where vaccine availability is increasing and economies are opening up, and we remain confident in our full year guidance,” CEO James Quincey said in a statement.

AT&T also reported a boost in its customer growth, primarily due to an increase in wireless usage, equipment sales and 2.7 million HBO Max subscribers. The company’s revenues increased 2.7% last quarter, with $7.5 billion in net income.

Things are starting to look up for airline carriers, too. The industry, one of the hardest hit during the pandemic, has been kept afloat primarily through billions of dollars in loans under the CARES Act. While American Airlines posted a $1.3 billion net loss last quarter, it also raised $10 billion through debt offerings and has already paid off its loan from the Treasury Department.

“Looking forward, with the momentum underway from the first quarter, we see signs of continued recovery in demand,” CEO Doug Parker said in a statement. “We remain confident the network enhancements, customer-focused improvements, and efficiency measures we’ve put into place will ensure American is well-positioned for the recovery.”

After a pleasantly low unemployment report last week, the Labor Department again posted a drop in new initial unemployment claims. During the week of April 17, 547,000 new claims were filed, compared with 586,000 the previous week, cheering economists and investors alike.

“While we may see some bumps along the way, initial claims appear to be on a clear downward path,” said economist Nancy Van Houten at Oxford Economics. “However, we expect a full recovery in the labor market to be a gradual process.”

Van Houten predicts another 6 million jobs will be created throughout 2021, with employment finally reaching pre-Covid levels in mid-2022. “While the data may be noisy from time to time in the weeks ahead, claims appear to be on a clear downward path,” she said

Not all unemployment claims are equal, however. A dozen states — all of them largely rural — are essentially back to full employment, while 11 states with larger populous areas still have higher unemployment rates, according to an analysis by Nicholas Colas and Jessica Rabe at DataTrek Research.

Among the “loser” states, California has an 8.3% unemployment rate, New York has an 8.5% rate, and Illinois has a 7.1% rate, they found.

“The pandemic recession hit large American cities harder than the rest of the country due to their leverage to in-person commercial activities like business travel [and] tourism, as well as the shift to work-from-home,” they wrote. “It will be some time before they fully recover.”

Investors also are encouraged by the vaccine rollout, which is ahead of schedule despite a few bumps due to problems with the Johnson & Johnson dose. About 3 million shots are being given per day, and more than 218 million doses of one of the vaccines have been administered, beating President Biden’s pledge to dole out 200 doses during his first 100 days in office.

According to the U.S. Centers for Disease Control and Prevention, nearly 90 million Americans have been fully vaccinated against Covid-19, while 136 million have received at least one dose as of the morning of April 22.

The virus has abated in some areas of the world but continues to ravage others, such as India. According to data compiled by Johns Hopkins University, nearly 145 million people have been infected with Covid-19 worldwide, while more than 3 million have died. In the United states, roughly 32 million have been infected, while 570,000 have died.

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