With the pandemic pushing things back a month, Monday of this week was Tax Day. What that means for us is sometimes we see a lot of selling right before taxes are due…
And we’ve seen a lot of selling the past few weeks.
Stocks made huge moves up in 2020, and if people sold during that time period, they have to pay capital gains on them. So that’s one piece of the puzzle in the recent sell-off…
The other part of taxes has to do with what the White House is telling us, and President Joe Biden has been crystal clear about wanting to raise taxes on the top 1% of earners.
I’m not here to talk about politics. But what I do want to talk about is how politics impacts Wall Street.
All things being equal… Does the stock market like higher taxes?
If you go back and look at the Bush and Trump tax cuts, stocks generally went up afterward. Stocks rise when taxes fall because it stimulates the market and, more importantly, the economy.
So that’s one major way politics impacts Wall Street.
The economy and the stock market are related. And what happens on Main Street impacts Wall Street, and vice versa. The thing about Wall Street is it’s a forward-looking mechanism. It looks to the future… three… six… nine… 12 months and so on.
The economy looks backward and tells us what already happened. So earnings come out and tell you what happened last quarter. The GDP number comes out and tells you what happened last quarter or last year. A jobs report tells you what happened last month…
But the stock market is always pricing in the future.
The prospect of higher taxes is the concern right now. Because if you’re sitting here with say… massive gains from past year and can lock in a lower tax rate by selling now, would you do that? Or would you hold and wait until your capital gains tax is doubled if not more, depending on your tax bracket?
So what do you think the top 1% of wealthy people are doing? Of course they’re selling! And that’s going to make your stocks drop.
Another factor sending stocks lower the past few weeks is higher inflation. We’ve been talking about it here for a while. Lumber… food prices… just about everything under the sun is more expensive now.
And the Federal Reserve is playing with fire. The Fed continues to have emergency measures in place when the emergency is over. And what are the consequences?
Check out my short video and let’s continue the discussion on how politics impacts Wall Street.
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