Next week, in a speech to Congress, Biden is likely to detail the tax plan he outlined during his campaign. Reports suggest that the capital-gains tax rate on people earning more than $1 million a year would increase from 20% to 39.6%. That would be the highest tax rate on investment gains since the 1920s, with the expected tax increases going to pay for proposed education and antipoverty programs.
At first glance, higher tax rates for capital gains may appear a bad thing for stocks. However, historical precedence doesn't bear this out, as the past two tax increases, in 1987 and 2013, were followed by a strong market for the following 6 months.
DAILY CHART OF S&P 500 JANUARY 2013 - JANUARY 2014
Similarly, the economy was healthy both those years, with an accommodating Federal Reserve as well as fiscal stimulus giving an edge to current economic conditions. Should we get a tax rate increase this year, analysts expect some selling towards the end of 2021, but overall, it's anticipated that the markets – which have already been forewarned of a tax hike – will be able to digest the news.
That's great news for subscribers of my MEM Edge Report, as, this weekend, I'll be revealing a stealth rotation that's taking place in the markets and the best stocks to take advantage of it.
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Mary Ellen McGonagle