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End of Day Brief - Thursday April 22 - Tax trouble

SP 5004134.98-38.44(-0.92%)
10-yr Note +1/321.556
NYSEAdv 1276 Dec 1971 Vol 866.1 mln
NasdaqAdv 2010 Dec 2052 Vol 4.4 bln

Industry Watch

Strong: Real Estate
Weak: Information Technology, Consumer Discretionary, Materials, Energy, Financials

Moving the Market

-- Reports indicated that President Biden will propose increasing the capital gains tax rate to as high as 43.4% on Americans earning more than $1 million

-- Convenient excuse to do some selling

-- Q1 earnings generally exceeded expectations, weekly jobless claims declined to post-pandemic low

Stocks lower as Biden reported to propose capital gains tax boost

Stocks were in a narrow range in morning trading and searching for direction. That direction was found, and it was lower, following news that President Biden is set to propose a plan that could nearly double capital gains taxes on the wealthy. The rise in virus cases globally, notably the surge in India, is continuing to cause some jitters for investors as the possibility of a delay to the expected global recovery rises along with infections.

ECONOMIC EVENTS: In the U.S., jobless claims fell 39,000 to 547,000 in the week ended April 17. The Chicago Fed's National Activity index rose 2.91 points to 1.71 in March. Existing home sales declined 3.7% in March to a 6.01M rate. The leading economic indicators index rose 1.3% to 111.6 in March, which was a little stronger than expectations.

In White House news, Bloomberg reported that President Joe Biden intends to propose to boost the capital gains tax rate to 39.6% for those earning $1M or more, an increase from the current base rate of 20%. When coupled with the 3.8% tax on investment income that funds the Affordable Care Act, federal tax rates for investors could be as high as 43.4%, sources told Bloomberg.

Meanwhile, Reuters reported that U.S. Senate Republicans have proposed a five-year, $568B infrastructure plan in an attempt to counter President Joe Biden's wide-ranging $2.3T proposal. The package, which is lower than an initial GOP target range of $600B-$800B, focuses narrowly on typical infrastructure projects including roads, bridges, rail, ports, water systems, and on broadband access, and it would not result in higher taxes but be fully paid for through user fees and unspent federal funds, according to Reuters.

TOP NEWS: Shares of AT&T (T) rose 4.2% after the company reported better than expected first quarter earnings and revenue. The company, which reported 2.7M total domestic HBO Max and HBO subscriber net adds in Q1, said it "continued to excel in growing customer relationships in our market focus areas of mobility, fiber and HBO Max."

Dow (DOW) shares closed 6% lower despite the fact that the company reported better than expected operating EPS and revenue and said it "entered the second quarter with increasing momentum."

In other earnings news, Chipotle Mexican Grill (CMG) shares fell 1.8% despite the company reporting better than expected first quarter earnings and saying its "off to a great start in 2021."

In M&A news, Hartford (HIG) announced the receipt of two additional unsolicited proposals from Chubb Limited (CB) to acquire the company. Hartford revealed along with its earnings report that Chubb (CB) said it was prepared to offer "in excess of $67 per share" if The Hartford would engage in "meaningful discussion and due diligence." The Hartford then received another letter on April 14, in which Chubb said it was willing to increase its offer to "$70 per Hartford share, the top end of our range," but Hartford's board of directors unanimously rejected both proposals, determining that entering into discussions regarding a strategic transaction "would not be in the best interests of the company and its shareholders." In response, Chubb issued a statement that said in part: "The Hartford has chosen not to engage in response to any of our proposals. The path to a transaction would have been engagement coming from The Hartford on the terms of our last proposal. Although we are disappointed, we want to repeat that our shareholders demand of us, and we demand of ourselves, that we remain a disciplined acquiror."

Meanwhile, Reuters reported that two U.S. Senators, Democrat Gary Peters and Republican John Thune, are working to attach legislation to allow automakers to deploy tens of thousands of self-driving vehicles on U.S. roads to a bipartisan China bill. Publicly traded companies in the space include Tesla (TSLA), General Motors (GM), and Alphabet (GOOGL) with its self-driving unit Waymo.

Additionally, Boeing (BA) was in focus after Reuters reported that the Federal Aviation Administration said that 106 Boeing 737 MAX aircraft have been grounded globally due to an electrical issue and that the planemaker is still working on a fix.

MAJOR MOVERS: Among the noteworthy gainers was Renalytix AI (RNLX), which rose 15.1% after announcing that the U.S. Government has granted the company a 10-year governmentwide acquisition contract to provide KidneyIntelX early-stage kidney disease bioprognostic testing services. Also higher was Teradata (TDC), which gained 26.6% after reporting quarterly results.

Among the notable losers was Danimer Scientific (DNMR), which declined 8% after Spruce Point Capital issued a short report predicting 65% share downside. Also lower was Fisker (FSR), which fell over 9% after Goldman Sachs analyst Mark Delaney downgraded the stock to Sell from Neutral.

Reviewing Thursday's economic data:

  • Initial jobless claims for the week ending April 17 decreased by 39,000 to 547,000 ( consensus 600,000). That is the lowest initial claims have been since the week of March 14, 2020. Continuing claims for the week ending April 10 decreased by 34,000 to 3.674 million. That is the lowest continuing claims have been since the week of March 21, 2020.
    • The key takeaway from the report is that the absolute level of claims is still high, yet there are clear signs of relative improvement that continue to support favorable recovery-minded views for the labor market and the economy.
  • Existing home sales decreased 3.7% m/m in March to a seasonally adjusted annual rate of 6.01 million ( consensus 6.15 million) from an upwardly revised 6.24 million (from 6.22 million) in February. Total sales in March were up 12.3% from a year ago.
    • The key takeaway from the report is the same as last month: the supply of existing homes for sale remains near all-time low levels. That is driving up the pace of price increases well beyond the pace of income gains, which is going to create affordability pressures for prospective buyers along with rising mortgage rates.
  • The Conference Board's Leading Economic Index (LEI) increased 1.3% m/m in March ( consensus 0.6%) following a downwardly revised 0.1% decline (from +0.2%) in February. That revision marked the end of a string of nine consecutive months of increases for the LEI.
    • The key takeaway from the report is the recognition that all ten components made positive contributions, which is a testament to the recovery/reopening momentum that is being aided by increasing vaccine adoption rates.

Looking ahead, investors will receive New Home Sales for March and the preliminary IHS Markit Manufacturing and Services PMIs for April on Friday.

  • Russell 2000 +13.1% YTD
  • Dow Jones Industrial Average +10.5% YTD
  • S&P 500 +10.1% YTD
  • Nasdaq Composite +7.2% YTD

Disclosure: I may trade in the ticker symbols mentioned, both long or short. My articles represent my personal opinion and analysis and should not be taken as investment advice. Readers should do their own research before making decisions to buy or sell securities. Trading and investing include risks, including loss of principal.

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