Biden Tax Increase Proposal Hits Stock Market Hard, Kills Gains

President Joe Biden’s proposal for tax increases halted the strong upward move in stock prices this week. The progressive economic agenda has always had predictable consequences, and none of them are good.

The Week That Was

Weekly employment data continue to show declines in initial unemployment claims and the number of workers receiving unemployment payments.

Things to Come

Much will happen next week. The Federal Reserve Board’s meeting, however, will end without any significant policy change.

Next Thursday, the GDP numbers for the first quarter are likely to show a real growth rate in the vicinity of 6 percent and an 8 percent annual-rate increase in current dollar spending. The following table shows first quarter trends in currently available data.

First Quarter GDP Estimates

(Percent=annual rate of change)

                                                4th qtr. 2020      1st qtr. 2021

Current-dollar GDP                      6.1%                   8.0%

Personal Income                           -6.9%                   9.4%

Wages & Salaries                           9.0%                    4.8%

Consumer Spending                       3.8%                    7.2%

Retail Sales                                   0.9%                   34.7%

Real GDP                                     4.1%                     6.0%

Real consumer spending               -2.0%                     3.8%

Real Disposable income               -10.1%                    6.6%

Hours worked                              10.1%                    2.5%

Payroll jobs—all                             5.0%                     2.1%

Payroll jobs—private                      7.2%                     2.3%

Initial unempl. Claims                 782,000                 797,000

ISM—manufacturing                      59.0                      61.4

ISM—non-manufacturing               56.9                      59.2

ISM—manufacturing orders           66.7                       64.6

ISM—nonmanf. orders                  58.3                       60.3

Price Index                                2.1%                      2.0%

CPI (core)                                   1.8%                      1.2%

Consumer deflator core                1.3%                      2.1%

Government payments associated with stimulus bills are distorting many of these numbers.

From the standpoint of inflation, the key number is current dollar spending. This is the first place to look for signs of rising inflation. If current dollar spending grows at a 7 percent or 8 percent annual rate, it will be evidence of an increase in inflationary pressures arriving soon.

Next Friday’s report on consumer spending and wages and salaries for March will confirm the economy’s strong upward trend continued through the end of the first quarter.

Market Forces

The bull market continued this week, as many of the key stock indexes hit new all-time highs. However, the sharp reversal yesterday removed those gains and left stocks down 1 percent to 2 percent for the week.

Biden’s announcement of his plan to raise tax rates was the immediate cause of the reversal.

The most destructive part of Biden’s tax hike plan is taxing capital gains as ordinary income for those making more than a million dollars a year.

The reason these taxes are so destructive is they shift funds away from essential private
investments. That slows productivity growth and wage increases.

Everybody suffers.

Taxes on the rich have always been a major part of the Progressives’ failed economic plans. History is clear. Tax increases on the rich have been instrumental in bringing about every period of economic stagnation in our nation’s history.

It’s no secret Biden’s policies will hurt the economy. The only unknowns are how destructive they will be and how soon its effects will appear.

At least for the next few months, the Fed’s massive monetary increases are likely to remain the key force driving stock prices.

The recent decline in longer-term interest rates is likely to be temporary. As the economy soars and shortages become more prevalent, price increases and higher interest rates will follow.

Outlook

Economic Fundamentals: positive

Stock Valuation: S&P500 overvalued by 22 percent

Monetary Policy: highly expansive