With Caleb Silver,
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U.S. Equities Rise as Investors Shake Off Tax Worries
Investors shook off their fears about the prospect of higher capital gains taxes and bought yesterday’s dip, sending all major indexes sharply higher for the day. The S&P 500 tacked on 1.1% and the Nasdaq added 1.6% as investors returned to risk, driving tech stocks and recovery-related sectors higher. Volatility, which blew in for the week, left town early as steady and orderly buying returned to the markets.
Perhaps investors know it will be a tall order for President Biden to pass such an aggressive capital gains tax hike, or that even if he does, it will be slimmed down to a more palatable percentage for high-net-worth investors. Only 0.3% of U.S. taxpayers would be impacted by his reported proposal, but given the amount of capital they own, the ultra-wealthy can raise a pretty big stink.
Or, perhaps investors have looked back into recent history to see how higher capital gains taxes have hurt the stock market over the past 50 or so years. The truth is, according to LPL Financial, they don’t, unless the economy is in a weak place like it was in 1969 and 1976. If you hadn’t noticed, the economy is pretty strong, and it’s getting stronger.
Chart courtesy LPL Financial
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Homebuying Bonanza
It’s spring, and Americans are buying up new homes at the fastest rate in 15 years.
The Commerce Department reported that new home sales in March rose to a seasonally adjusted rate of 1,021,000 annually, a 20.7% increase from February and a 66.8% jump over March of last year. One reason for the monthly gains was better weather after severe winter storms hampered sales in February.
The median price of $330,800 was just 0.8% higher than last year.
The month-over-month new home sales increase was fueled in part because of the lack of available existing homes. Sales of those homes have fallen in the past two months because not enough of them are on the market to match the demand. Still, the National Association of Realtors reported this week that those sales were more than 12% higher than they were last March. So even with the supply issues for existing homes, a post-pandemic bump is clearly being felt in the housing market.
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Toilet Paper Crisis Is Officially Over
Here’s one sign the COVID-19 pandemic could be nearing the end: The run on toilet paper is over.
Kimberly-Clark reported a disappointing 8% drop in organic sales in the first quarter. Its consumer tissue segment, which includes toilet paper, Scott paper towels, and Kleenex tissue, fared even worse, down 14%.
Last year at this time, revenue from the tissue unit rose 13% as concern about lockdowns led people to flock to stores to buy its Cottonelle and Scott brand toilet tissue, in addition to paper towels and other cleaning products. That demand has waned, and CEO Michael Hsu said while the company anticipated slower tissue sales, the size of the decline in toilet paper came as a surprise.
Also dragging down the first quarter numbers was a continuation of revenue lost from sales to businesses and schools that remain closed or partially closed because of the pandemic. That unit saw revenue fall 13%.
Adding to the coronavirus-related issues, Kimberly-Clark’s profits were hurt by rising commodity prices and higher transportation costs related to bad weather and the pandemic.
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What to Expect Next Week
After another choppy week for investors where we saw volatility make a spring visit, the intensity looks to ramp up next week. Earnings season is at full tilt, and we’ll get results next week from Tesla, Amazon, Alphabet, and Ford, to name a few of the headliners.
Crypto investors are hoping this recent selling spate comes to a stop. Bitcoin tumbled into a bear market this week on worries about higher taxes and potential rules coming down from regulators. Still, the popular digital currency is the best-performing “asset” so far this year, and big dips are par for the course when it comes to Bitcoin.
Here are the returns for major asset classes so far this year.
Earnings-a-Palooza
Earnings are coming in much better than expected, and expectations were high. But it’s the future outlooks that we care about more when these companies present their report cards.
Tesla reports on Monday, and while the electric vehicle maker is expected to show a doubling of sales of $10.48 billion, up from $5.99 billion a year ago, the company is under regulatory scrutiny for two recent fatal crashes involving the use of its Autopilot feature. CEO Elon Musk has defended the feature and safety of Tesla’s vehicles, but investors will want more details. Tesla also has a very long position in Bitcoin, having added $1.5 billion of the cryptocurrency to its treasury last quarter. With Bitcoin’s price in a tail-spin, it could have a material effect on its books.
FOMC Meeting
The Federal Open Market Committee (FOMC) of the Federal Reserve meets next Tuesday and Wednesday on interest rates and monetary policy. We should not expect the Fed to make any changes to the federal funds rate because it keeps telling us that will happen in 2023. Still, more FOMC members have tightened their timelines about when that should happen, given the strength of the economic recovery. Inflation is still lower than where the Fed would like it, even though almost everything we buy is more expensive today than it was six months ago. Investors will want to hear that the Fed will keep up its $120 billion of government bond purchases every month, which has laid a nice safety net under capital markets.
Personal Income and Spending
On Friday, we’ll get reports on U.S. personal income and spending. Retail sales spiked last month as the first round of stimulus checks hit bank accounts. Another wave went out in the past two weeks. Are consumers putting that back into the economy, or are we still not ready to spend again like its 2019? We’ll find out.
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