The Market Today
Capital Gains Tax Plan Roils Markets
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
New Home Sales Expected to Rebound: New home sales (9:00 a.m. CT) are expected to rebound 14.2% in March after falling 18.2% the month prior.
April PMI’s Improving, U.S. Expected to Inch Higher: The Markit PMIs for the month of April are expected inch even higher than their solid March results. Released overnight, the Markit PMIs covering both manufacturing and service sector activity in the Eurozone were stronger than expected. Notably, the EU service sector PMI rose from 49.6 to 50.3, the first time it has been above the 50-level since August. The U.K.’s PMIs rose to their highest level in seven years.
24 HOURS OF MARKET ACTIVITY
Equities Slumped Thursday on President’s Plan to Double Capital Gains Tax on the Wealthy
Stocks had gradually recovered Thursday from a weak open but reversed sharply back into negative territory midday on reports President Biden was considering nearly doubling the capital gains tax rate on wealthy Americans (more below). The S&P 500 had climbed as much as 0.1% after falling 0.4% shortly after the open. The index, however, tumbled on the capital gains tax headlines, falling by more than 1% in roughly an hour. The S&P 500, Dow, and Nasdaq ultimately ended 0.9% lower. The news also buffeted Treasury yields from session highs. After reaching as high as 1.59% Thursday, the 10-year yield closed down 1.7 bps at 1.54%, extending a recent downward trendline to its lowest level since March 10.
Global Stocks Subdued Friday Despite Some Encouraging News in April PMIs
U.S. equity futures had only marginally recovered at 7 a.m. CT on Friday in front of the first glimpse at national activity surveys from Markit for April. European equities were weaker and Japan’s Nikkei slipped during a mixed Asian session despite PMI data from those regions showing a pick-up in activity in recent weeks. The Eurozone’s Composite PMI inched up from 53.2 in March to 53.7 as the manufacturing index rose to a record high and the services index improved from 49.6 to 50.3, the first expansionary reading in eight months. In addition to stronger growth indications and consistent with U.S. trends, measures of prices paid and received were notably elevated amid supply and demand imbalances caused by the pandemic. At 7:30 a.m. CT, the Treasury curve was essentially flat and S&P 500 futures were up just over 0.1%.
Existing Home Sales Cool More Than Expected in March, Largely on Supply Woes: Following February’s 6.3% slump, existing home sales declined 3.7% in March, disappointing expectations for a smaller 1.8% slowdown. The 6.0mm annualized-unit pace marked the slowest since last August. Despite declines in all four regions, however, there was evidence that supply issues were more to blame for the softer monthly figures than was weaker demand. The average number of days a house was on the market dropped from 20 to a record low of 18. The share of sales to first-time and all-cash buyers rose. And the median selling price of $329.1k and 17.2% annual price gain both set new records. The NAR’s chief economist echoed that, saying “We know that home prices have been rising, mortgage rates inching higher, housing affordability becoming much more challenging, however…Demand remains strong, it is simply the severe lack of supply that is holding back sales conditions.”
Kansas City Fed Manufacturing Index Rises More Than Expected to Record: The Kansas City Fed’s Manufacturing Index jumped by more than expected in April, from 26 to a new record high of 31. Most of the current activity indices improved over the month and indices tracking prices paid for raw materials and received for finished goods both rose to records. Supply chain pressures, however, eased from April’s series high and for the first time in six months. Expectations for activity six months from now edged down 1 point but remained near a record high.
President Considering Doubling Capital Gains Tax Rate on the Wealthy: Reports indicated that President Biden is considering more than doubling the capital gains tax rate on wealthy Americans. According to a Bloomberg report, “President Joe Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6%, which, coupled with an existing surtax on investment income, means that federal tax rates for investors could be as high as 43.4%, according to people familiar with the proposal. The plan would boost the capital gains rate to 39.6% for those earning $1 million or more, an increase from the current base rate of 20%, …A 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than the top rate on wage and salary income.” The proposal is expected to be made as part of the American Families Plan, which is anticipated to be released next week.
GOP Counters President Biden’s $2.3 Trillion Infrastructure Plan: A group of Senate Republicans released the framework of a $568 billion infrastructure counterproposal to President Biden’s $2.3 trillion American Jobs Plan. According to the Wall Street Journal, “The two-page Republican plan—which includes spending on roads, transit systems, and broadband internet over five years—doesn’t provide specifics on how it would cover the cost of the bill, a central issue in the talks. The GOP proposal calls for collecting user fees for electric vehicles and repurposing existing federal spending, while opposing Mr. Biden’s proposed tax increases on companies. Of the $568 billion in the outline, $299 billion would go toward roads and bridges, an increase from the $115 billion the Biden administration’s plan proposes. The GOP plan also dedicates $61 billion to public transit systems, $20 billion to rail and $65 billion for broadband.” One of the senators involved said, “As you can see, it consists of actual, real infrastructure.”