A report that President Biden will propose a sharp increase in taxes on the earnings wealthy individuals make from their investments sparked a market sell-off Thursday afternoon that left indexes significantly lower.
Investors who earn $ 1 million or more should pay a tax rate of 39.6% on any capital gain, nearly double the current rate for Americans in that income bracket, according to the Bloomberg report. A separate surtax on investment income could raise the overall federal tax rate for high net worth investors up to 43.3%, according to the report, citing anonymous people familiar with the proposal.
The S&P 500 fell 0.9%, erasing an early gain. The benchmark gave up almost all of its gain from the previous day, leaving it on track for its first weekly loss in five weeks.
The sell-off was widespread, with each sector of the S&P 500 closing lower. Much of the slippage was tech stocks, banks, and businesses that depend on consumer spending. T-bill yields have remained broadly stable.
“The things the market will react to are unknowns,” said Andrew Mies, chief investment officer of 6Meridian. “What we know is that the economy is good and improving, the profits are good and the vaccinations are going pretty well in the United States. What the market doesn’t know are tax policy, both at the corporate and individual level, and what the Fed is going to do in the next 12-18 months. “
The S&P 500 lost 38.44 points to 4,134.98. The Dow Jones Industrial Average fell 321.41 points, or 0.9%, to 33,815.90. The Nasdaq slipped 131.81 points, or 0.9%, to 13,818.41.
The S&P 500, which set a record Friday, started the week with a two-day slide before closing higher on Wednesday. It is still down 1.2% for the week.
Small business stocks also lost ground. The Russell 2000 Index lost 7.01 points, or 0.3%, to 2,232.61.
Stocks have rallied in recent weeks amid a spate of encouraging reports on hiring, retail sales and other economic data. COVID-19 vaccinations and massive backing from the U.S. government and Federal Reserve fuel expectations of strong corporate earnings growth as more businesses reopen after being forced to close or operate on a limited basis due to the pandemic.
The government’s latest round of stimulus has helped boost retail sales, and investors now have to weigh other proposals in Washington, including possible tax law changes and a 2.3 billion dollar infrastructure project. trillions of dollars that Biden called to spend over eight years.
Aside from Washington, investors are focusing on earnings as most S&P 500 companies spend the next few weeks releasing their financial results. Wall Street hopes to gain a better understanding of how businesses across various industries are benefiting from the economic recovery. They are also listening for clues about the prospects for recovery as vaccine distribution continues and people try to return to some semblance of normalcy.
AT&T rose 4.2% after posting better-than-expected results, helped by higher mobile phone charges as well as the success of its HBOMax streaming service. Equifax jumped 14.9% after also reporting strong results.
Union Pacific fell 2.4% after the rail operator reported a 9% drop in profits.
The market as a whole has had a choppy week of ups and downs as Wall Street digests profits and tries to gauge how well and how quickly the U.S. and global economy will recover through 2021.
“It’s not a clear time in the market,” said Jay Hatfield, CEO and portfolio manager at Infrastructure Capital Advisors. “You are in a trading range until you get more clarity on the global recovery.”
The United States is showing strong signs of recovery, while Europe and other parts of the world are lagging behind. That will likely change as soon as more vaccines are distributed internationally, Hatfield said.
Credit Suisse fell 3.6% after the Swiss bank said it would issue more shares to help it recover from losses suffered due to a hedge fund implosion earlier this year . Credit Suisse had been one of the main backers of Archegos Capital Management, which collapsed last month after several of its bets went down.
Investors got good news on the economy when the Labor Department announced that the number of Americans filing for unemployment fell again last week. Unemployment claims stood at 547,000, the lowest point since the start of the pandemic and an encouraging sign that layoffs are slowing.
The 10-year Treasury yield slipped to 1.55% from 1.56% on Wednesday night.