It was not just the price of pork chops.
Last week, investors weighed mixed news as strong corporate earnings were offset by higher grocery prices and rising numbers of global coronavirus cases.
Solid corporate earnings weighed favorably.
So far, 25 percent of the companies in the Standard & Poor’s (S&P) 500 Index have reported first-quarter earnings, with 84 percent of those stating that profits grew faster than expected, reported John Butters of FactSet. The blended earnings growth rate for the S&P 500 (which includes estimated earnings for companies that have not yet reported and actual earnings for companies that have) was 33.8 percent last week. For context, the 5-year average earnings growth rate (actual earnings) for the S&P 500 was 6.9 percent as of last week.
It is important to remember that the impact of earnings is often muted, as earnings expectations – good or bad – tend to be priced into the market long before they are reported.
Inflation expectations weighed unfavorably.
Investors were concerned about inflation – and so were consumers. While the Federal Reserve and many economists believe we will experience just a fleeting uptick in inflation, others think the increase will persist. “…A consistent drumbeat of price hikes from major companies, consumer reports, and market data suggest the world may not be going along with their conclusion,” reported Dion Rabouin of Axios.
It is likely that investors will pay particularly close attention to Federal Reserve statements about inflation and interest rates this week.
Rising numbers of Covid-19 cases around the world tipped the scales.
Concerns about India’s coronavirus surge, Japan’s state of emergency, and rising numbers of cases around the world caused investors to reassess expectations. Some sold shares of companies that were expected to benefit from the re-opening of world economies. Yun Li and Maggie Fitzgerald of CNBC reported:
“The sell-off in shares that are tied to a successful reopening came as the World Health Organization warned that global coronavirus infections were edging toward their highest level in the pandemic. In the United States, while the country is maintaining a pace of 3 million reported vaccinations per day, about 67,100 daily new infections are still being recorded.”
Despite uncertainties, 67 percent of professional investors who participated in Barron’s Big Money Poll said they were bullish on the outlook for stocks in the next 12 months. Just 7 percent were bearish.
Major U.S. stock indices finished the week flat or slightly lower. U.S. Treasuries rallied briefly before finishing the week flat.
(The one-year numbers in the scorecard below remain noteworthy. They reflect the strong recovery of U.S. stocks from last year’s coronavirus downturn to the present day.)
A CAPITAL GAINS TAX HIKE HAS BEEN PROPOSED. Another factor that influenced last week’s stock market decline was the proposed capital gains tax hike. Investors’ responses were a bit surprising, since the tax increase wasn’t really news. Ben Levisohn of Barron’s reported:
“President Joe Biden made no secret of his plan to raise capital-gains taxes on the very wealthy. It was a campaign pledge, one that got enough attention for Goldman Sachs to release a note looking at the historical impact of previous increases on the stock market. (The answer: not very much.)”
According to Steve Goldstein of MarketWatch, the Goldman note reported the wealthiest U.S. households sold 1 percent of their equity assets prior to the 2013 capital gains tax increase. As a result, the S&P 500 Index experienced a short-lived loss six months prior to the tax hike. Yet six months after the tax hike, the index was back in positive territory.
While the long-term impact on stock markets may be relatively small, the effect on high income investors could be significant.
The administration’s proposal, as written, would nearly double the capital gains tax rate for people with adjustable gross income of $1 million or more. (That’s about 0.3 percent of American taxpayers.) The current top long-term capital gains tax rate would increase from 20 percent to 39.6 percent, reported Laura Davison and Allyson Versprille of Bloomberg.
As of now, the capital gains tax increase is simply a proposed change. It has not been finalized. There are indications, that if the bill is passed at all, the final rate may be lower.
If you have concerns about the potential tax increase and would like to learn more, please contact us at (520) 232-0505.
Weekly Focus – Think About It
“Share prices fluctuate more than share values.”
--Sir John Templeton, investor, banker and asset manager
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Treiberg Wealth Management, a registered investment advisor and separate entity from LPL Financial.
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