1. Moving the markets

A weak opening reversed quickly, as the major indexes found enough mojo to reclaim their respective unchanged lines. That is until news struck fear in the hearts of traders because of the Biden Administration’s plan for the capital gains tax to be almost doubled.

Via ZH, Bloomberg explained it this way:

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%, the people said on the condition of anonymity because the plan is not yet public.

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, they said.

The proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor. Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it’s unfair that many of them pay lower rates than middle-class workers.

For $1 million earners in high-tax states, rates on capital gains could be above 50%.

For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22%. For Californians, it could be 56.7%.

Ouch! However, things could get even worse, if this change would be made retroactively for 2021, thereby giving no one with a taxable account a chance to cash out at the current lower rate.

Needless to say, markets reversed instantly with all major indexes puking with the Dow shedding 300 points within seconds. Benefiting were bonds, which rallied as yields dropped.

For sure, uncertainty has risen a notch, but it is unclear whether this proposal can be passed in its present form, but it indicates that future policies may a lot less market friendly than what we’ve seen in the past.

It remains to be seen if more market fallout is to come, although the bounce in the last hour can be seen as a positive.

1. Moving the markets

The futures already pointed to a reversal, with the S&P switching from red to green, which continued into the regular session, as all three major indexes attempted to wipe out the losses of the past two days.

As the chart above shows, there was no hesitation nor any looking back with the bulls clearly being in charge driving the indexes out of their recent doldrums. The Nasdaq lagged for a while, as Netflix proved to be a drag with an 8% plunge, but in the end, the index picked up speed and led the majors with a 1.19% advance.

SmallCaps came back from hibernation with VBK recovering 2.04%, which was closely followed by our value play, RPV, which added a solid 1.94%. Even the equally weighted S&P index (RSP) outperformed its Large Cap SPY cousin with an increase of 1.31% vs. 0.92%.

So far, the earnings season has been touted a success with companies delivering solid quarterly results, however, most analysts are now focused on the outlook of companies willing to make any forecasts.   

More than 70 S&P 500 companies have reported so far, according to CNBC, and they have on average posted a 23% upside to analysts’ earnings expectations. The volatility index (VIX), which rises when markets fall, dropped after advancing two days in a row, as all was calm in the trading community today.

Sure, there are always things to worry about, like the course of Covid, inflation concerns, debts and deficits, and the occasional earnings miss. But, right now, the bulls appear to have the upper hand, and major trends continue to be higher with new ATHs being made almost weekly.