Market Update: Mar 26 2021
- Tax Reforms
- Market Expectations
- Federal Rates
Here is a recap of our live Q&A session held on 3/26/21 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management.
Details for our next session, 4/9/21, can be found here.
With headlines about higher taxes starting to pop up, what does that mean for the stock markets?
The threat of higher taxes may certainly add to the volatility of the market immediate term. Consider an example with the possibility of higher capital gain rates in a year and you are sitting on investments that have significant gains that you may not consider part of a forever portfolio. In theory, investors may sell those stocks this year, opt to pay the capital gain tax, and then perhaps purchase back some of those shares in the new year. The effect is paying a known 20% capital gain tax versus taking the chance of paying something 10 or 20% higher.
It is important to stress, however, that volatility around tax hikes has historically been rather temporary and we certainly do not suggest making investment decisions based solely on that possibility. According to JP Morgan, capital gain tax rate increases in 1987 and 1993 caused only modest intra month volatility and saw losses of less than 5%. In addition, consider the fact that the current administration has also talked about significant increase in infrastructure outlays on the heels of tax reform. In theory, additional government spending presents opportunity for continued earnings growth in many sectors of the economy.
In short, we believe it is certainly too early in the year to make portfolio decisions based on the possibility of tax reform. And, even when we get more information on what that might look like, we encourage sticking to longer term strategies and avoid trying to predict or time market moves.
Can you comment on the impact the Fed’s comments regarding interest rates might have on the markets?
I think it is safe to say that recent equity market volatility has been triggered in part by the rising yield on Treasuries. When the Fed mentioned not touching interest rates for a couple more years, that certainly had a positive impact on equities and triggered a drop in Treasury yields, as you saw the 10 year Treasury drop from roughly 1.8% to the mid 1.6% range. An argument can certainly be made that, on the heels of the feds affirmation of lower rates for the foreseeable future, Treasury yields may level off and give equities more room to breathe. We believe that the Federal Reserve makes their comments and decisions based on economic data and forecasts much more detailed and accurate then we may have access to at that same time. As a result, their position of keeping rates low for two more years may signal at the Treasury have overreacted to the prospect of more economic growth post vaccine. And, if the rising Treasury yields have helped cause volatility in a pullback in growth stocks, we might expect that a leveling off or even retraction of the yields may give growth stocks an opportunity to rebound.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.
Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short term or have grown consistently over the long term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors’ perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments.