Man and machine were aggrieved Thursday at the prospect that wealthy versions of the former may have to pay higher taxes on capital gains.
The news, which was seemingly “out there” hours before Bloomberg reported it, shouldn’t have been anyone’s idea of a surprise. Analysts long ago quantified what they believed to be the likely impact of a proposal similar to that Joe Biden will unveil next week as part of a broader social spending plan.
That said, rally skeptics have argued for months that higher taxes (corporate or otherwise) weren’t priced in, so perhaps this was a literal manifestation of “buy the rumor, sell the news.” Investors bought all the way up on “rumors” of higher taxes, and then they did some selling when Bloomberg re-reported what The New York Times said three hours earlier.
“The people most concerned with capital gains are high-end active traders and hedge funds,” AxiCorp’s Stephen Innes said. “The problem is that most of these folks provide a good chunk of liquidity to the market, which is the immediate cause for concern.”
And so, Thursday’s narrative wasn’t any of the three I suggested on Wednesday afternoon, in the humorous “Stay Tuned.” Instead, it was “Stocks fall on Biden tax plan.” You can expect that headline to be recycled a few hundred times over the course of the next three years.
Some unfortunate soul offered the following assessment to Bloomberg for a quick reaction piece purporting to take the temperature of investors now that the wealthy are getting the tax chills:
The devil will be in the details — will it be retroactive to January 1 of this year and then you wouldn’t need to sell right away? Will it be the beginning of next year? That all begs the question, will it get passed?
That, boys and girls, is why I encourage everyone to spend at least an hour each day reading. That’s not how you use the phrase “begs the question.”
Anyway, thank God the financial media was in the mood to Make Old News New Again, because otherwise, it would have been a listless session, even as listless sessions go.
Instead, US equities tumbled a truly “ghastly” 0.9%, leaving the S&P “just” ~14% rich to its 200-day moving average (figure below).
In case you’re not picking up on the sarcasm, characterizing Thursday as “the worst session since mid-March” is technically true, but it’s misleading for a couple of reasons.
First, it kind of makes you forget that March was just last month. Like: “God, I’m famished. I haven’t been this hungry since earlier this morning, before breakfast.”
Second, anyone reading commentary about Thursday representing the “biggest selloff in more than a month” would think that something went wrong. In fact, this is what happened. The New York Times confirmed that the Biden administration intends to incorporate a campaign pledge into Joe’s forthcoming American Families Plan. Bloomberg re-reported it three hours later, preceded by the usual all-caps “red hed” deluge, which triggered knee-jerk selling. Then, the journos tasked with writing the daily market summary looked around at a couple of torn up throw pillows and did their best innocent-puppy-when-you-walk-in-the-door-after-work impression: “We don’t know what happened to these pillows, but it’s sooo bad.”
This managed to obscure and otherwise overshadow one piece of very good news (a new pandemic-era low for US jobless claims) and one piece of absolutely horrific news (India set a global record for most daily COVID infections).
On Thursday, India recorded 314,835 new virus cases. That was some 500 more than the US recorded on its worst day in December, when the world’s foremost democracy was mired in a multi-faceted existential crisis.
The situation in India is dire. It seems inevitable that cases will continue to rise and one shudders to think how high the daily fatality figures will be within two weeks. As documented here earlier this week, the country is on the brink of a full-on humanitarian crisis. It isn’t clear the government can handle it. If it continues along the current trajectory, it’s possible the international community will need to intervene.
Elsewhere Thursday, US rates were left to sit back and ponder the engineered equities mini-tantrum. Long-end yields were richer and the curve bull flattened. In a Thursday afternoon note, BMO’s Ian Lyngen and Ben Jeffery conducted something of a thought experiment which they described as “in effect the opposite of our call” to the extent it would push 10-year yields above 2.25%.
“In the event that the next three nonfarm payrolls prints come in >3 million – rapidly absorbing the labor market slack – 10s are going above 2.0% even in the absence of realized inflation,” they wrote, sketching out a hypothetical. “Not only would this encourage the Fed’s pursuit of maximum employment, it would also rekindle expectations for wage growth to pick up and give credence to the anecdotes of employers needing to pay up to lure workers away from the enhanced employment benefits established during the pandemic.”
Again, that’s not their base case, but folks are starting to conjure different scenarios given the proximity of what many contend will be a procession of blockbuster jobs reports.
For her part, TD’s Priya Misra reiterated her call for 2% on 10s by year-end. “We believe the recent price action is just a temporary breather in the longer term trend towards higher rates,” she said. “Economic data should strengthen even further in the months ahead and the supply of duration is also significant even after incorporating Fed QE throughout 2021.” She expects a $4 trillion fiscal plan to be passed by Congress later this year.
That brings us full circle. We’re all stuck in the fantasy that says spending needs to be “paid for,” so some of the addition fiscal spending markets expect will be extracted from taxpayers, via a higher levy on capital gains for people who can afford it.
“Lawmakers are twisting in the wind, trying to figure out how to ‘pay for’ a multi trillion-dollar infrastructure package,” Stephanie Kelton said Thursday. “Everyone knows I don’t play the ‘pay for’ game, but if I did, the IRS Commissioner just dished up a ~$10 trillion ‘pay for,'” she added, in the course of suggesting that one idea to raise money is simply to “enforce the existing tax laws.”