Stocks may not be pounded into the ground if the capital gains tax gets hiked per an aggressive new proposal from the Biden administration, Wall Street strategists say.
The S&P 500 (^GSPC) has gained an average of 1.4% in the three months before the four times the capital gains tax has been increased going back to 1969 (1969, 1976, 1987, 2013), according to new research from LPL Financial. Stocks surged 6.4% in the three months following the higher capital gains tax taking effect. Some 12 months later, the S&P 500's average increase was 4.3%, LPL found.
President Joe Biden is readying to increase the capital gains tax on the wealthiest Americans to 43.4%, including a surtax to help fund infrastructure investments. The current capital gains tax stands at a top rate of 23.8%, which has been in place since Jan. 1, 2013.
While the market has taken higher capital gains taxes in stride as LPL Financial's look back at history shows, there is one cautionary tale.
In the six months following an increase in the capital gains tax to 36.5% in 1969, the S&P 500 essentially crashed by 20.4% (see chart above). Goldman Sachs' equity strategist David Kostin notes momentum stocks in the tech space have sold off ahead of past increases in the capital gains tax, too.
Biden's capital gains proposal would put the tax rate well above that high-water level from 1969, meaning a repeat performance for the S&P 500 this time around must be carefully considered by investors.
That said, by and large, strategists think the market will deal with any increase in the capital gains tax in 2022. The U.S. economy is bouncing back strongly from the pandemic and lifting corporate profits — setting the table for investors to stay long stocks in the hopes for greater riches. From a longer-term perspective, Kostin points out that the wealthiest Americans are still likely to stay in the market as it's a powerful creator of wealth.
"We forecast net equity buying by households will total $350 billion in 2021 and be driven by the wealthiest 1%. The top 1% – which accounts for 53% of household equity ownership – has bought $2 trillion of shares during the past 30 years vs. $800 billion of net selling by the bottom 99%," Kostin says.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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