May 11, 2021

George Cafe Journal

The Power of Success

Get ready for $178 billion of selling ahead of the capital-gains tax hike. These are the stocks most at risk.

Avid readers of this column may have had a sense of déjà vu on Thursday. Last month, a Need to Know column explored what would pay for President Joe Biden’s infrastructure spending — and quoted a former Biden aide, Evercore ISI analyst Sarah Bianchi, who said it would “probably include nearly doubling capital-gains taxes on those with income over $1 million.” Not that it was any state secret — the Biden campaign’s website suggested such a move too.

In any case, the stock market reacted negatively to the Bloomberg News report that the White House was considering doubling capital-gains taxes on the wealthy to help pay for social spending, as the S&P 500
SPX
dropped by the most in a month. The news was particularly jarring to the highflying cryptocurrency space, with bitcoin
BTCUSD
and ethereum
ETHUSD
slumping.

One question now is whether the closely divided Senate will go for it. “Frankly, I suspect that these proposed tax increases will be knocked down at the hands of Senator [Joe] Manchin who remains the ‘swing’ vote in the Senate,” said Louis Navellier, the chairman of Navellier & Associates. An alternative is that the Senate could increase the capital-gains tax, but by a smaller amount — analysts at Goldman Sachs suggest they’ll settle at 28%, up from 20% currently. Another question is whether the tax will be applied retroactively or not.

Analysts at Goldman Sachs — in October — ran the numbers on the stock market impact of previous capital-gains tax hikes. While there is only a modest impact on the stock market as a whole, momentum stocks usually get socked before they are levied, they found. That makes sense — investors logically are more motivated to sell the stocks where they would save the most by avoiding higher capital-gains taxes.

The last time capital-gains taxes were hiked, in 2013, the wealthiest households sold 1% of their equity assets, the Goldman analysts found. According to the Federal Reserve’s distributional financial account data, the top 1% held $17.79 trillion of equities and mutual funds in the fourth quarter of 2020 — so a 1% selling of stocks this time would be $178 billion. (The most recent Internal Revenue Service breakdown, from 2018, found that millionaires accounted for just over 500,000 filers, or about 0.4% of the total.)

Here is the list of the top price gainers in the S&P 500 and Nasdaq-100 over the last year and over the last five years.

S&P 500 and Nasdaq-100 gainers

Company

One-year % change

Company

Five-year % change

Penn National
PENN
575

Enphase Energy
ENPH
6160

L Brands
LB
548

Etsy

2230

Caesars Entertainment
CZR
527

Advanced Micro Devices
AMD
1882

Tesla
TSLA
392

NVIDIA
NVDA
1538

Gap
GPS
368

Tesla

1318

Freeport McMoran
FCX
355

MercadoLibre
MELI
1137

Enphase Energy

321

Paycom Software
PAYC
943

Tapestry
TPR
237

Atlassian Corp.
TEAM
859

Etsy
ETSY
235

Align Technology
ALGN
733

Generac Holdings
GNRC
233

Generac Holdings

720

Moderna
MRNA
228

Micron Technology
MU
695

Peloton Interactive
PTON
226

Lam Research
LRCX
662

Align Technology
ALGN
224

ServiceNow
NOW
650

News Corp
NWSA
219

Zebra Technologies
ZBRA
647

SVB Financial
SIVB
210

Caesars Entertainment

645

Data: FactSet (News Corp owns MarketWatch, the publisher of this report.)

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