Flat week for the equity markets and bond yields continued their push lower, although the move seems to be running out of steam. It is somewhat notable that at one of the many bond auctions the government was able to sell 5-year TIPS with a real yield of -1.631%. This marks the lowest yield at issue in the entire history of the TIPS market at any maturity.
There was a decent amount of economic data this week, all mostly pointing in the same direction.
Weekly unemployment claims hit the lowest level since the COVID crisis started. However, the number is still elevated, as you can see below.
Existing Home Sales
Sales were down -3.7% in March but prices increased at a record-breaking annual pace of 17.2% to a historic high of $329,100.
Sales volumes were down for a couple reasons. Affordability, obviously, given the above appreciation rates. But a lack of homes for sale didn’t help. As of the end of March, housing inventory nationwide was 1.07 million units, down by 28.2% year-over-year. Properties typically sold in 18 days, a record low. As you can see below (red line), there are only two months-worth of supply on the market.
New Home Sales
Sales of new single-family houses were up +20.7% in March versus February’s level. They were up a massive +66.8% year-over-year.
Beyond the economic stats, the other big market related news concerns tax policy. On Thursday Bloomberg reported that the Biden Administration will propose to raise the federal capital gains tax rate to 39.6% sometime this year. This would be on people earnings over $1mm a year and would actually bump the top rate to 43.4% if you factor in the 3.8% tax on net investment income that Congress established in 2009. As you can see below, the proposal wouldn’t change the rate on people making less than $1mm/year.
Bloomberg also reported that this rate would likely also apply to qualified dividends, which are currently taxed at the same rate as capital gains. The markets initially swooned on the news, but recouped the losses on Friday. It seems like the general consensus is this is just an opening bid in a long, drawn-out process. To quote Goldman:
‘We expect Congress will pass a scaled back version of this tax increase. While it is possible that Congress might pass the proposal in its entirety, we think a moderated version is more likely in light of the razor-thin majorities in the House and Senate. At 43.4%, long-term capital gains would be taxed at the highest rate in the more than 100 years since Congress established the income tax. A 28% rate looks most likely, in our view, as it is roughly halfway between the current rate and Biden’s likely proposal. This is also the rate that President Reagan and a Democratic House settled on a few decades ago when raising the tax from 20%.’
The natural question for investors is how do markets react when capital gains taxes go up? Historically, at least, there hasn’t been much of an impact. Goldman looked at the last three hikes, and as you can see below, the market is typically down a touch before the effective date and then up six months after the hike.
Now this isn’t exactly a statistically robust sample size. The only longer-term study I could find is shown below. If it looks like noise, it is – hard to say there is any correlation whatsoever between capital gains rates and the market. It’s not that is doesn’t matter, but it is just one of many factors that impacts the market.
But the Goldman numbers do make some intuitive sense. Investors are likely to sell their big winners prior to a hike, so maybe this is a much bigger deal for the darlings of the last few years (yea, Tesla, we are looking at you!!) than it is for the market as a whole. But there’s a lot of ground to cover between now and when President Biden signs the official legislation, assuming we even get to that point.
Charts We Found Interesting
1. Striking differences in COVID cases around the world.
2. More data on India and Japan.
3. The 7-day average of US Covid vaccines administered peaked on the same day that J&J shots were halted.
4. Vanguard pulled in $1.5bn every single trading day in the first quarter, double that of anyone else.
5. If demographics is destiny, there are big changes coming. Now just what the changes are is a little less clear….
6. Another thing we should have bought at the COVID lows last March – a used car.
7. S&P 500 earnings are on track to hit a new high in Q1.
8. The picture below is a scannable QR code that appeared in the night sky over Shanghai a few days ago. This advertisement utilized 1,500 drones in just such a way, and with enough precision, that mobile phones could capture it as code that linked to a website. So very reminiscent of the Blade Runner movies!!
Have a good weekend.
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