Mission Statement:
To financially empower our clients so that they can achieve their most
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What happens to the stock market if taxes go up?
Using history as our guide, since 1950, stocks (as measured by the S&P 500) performed well almost every time. And the one time stocks went down the same year as a tax increase was 1969; negative 11%, during the Vietnam War.
I have to point out that past performance is no guarantee of future performance. But the most important thing to point out is that tax increases and stock market performance don’t happen in a vacuum.
There is an endless amount of things that affect stocks; interest rates, Government spending, geopolitics, innovation, inflation, etc. Not to mention the collective actions of millions upon millions of your fellow investors. So, in a vacuum, all else being eliminated from the equation, one would think that if you take money away from the private sector, it would negatively impact stock prices. In reality, we will never know for sure because that is strictly an academic debate. We could never actually observe this experiment in the real world.
Each year, tax increase or not, has its own unique place in history and its own unique set of economic happenstance. I could conclude now that tax increases don’t cause the stock market to rise; their relationship is only correlated. But I have a few more things to point out that gives us all an idea of how this correlation works.
Taxes could be categorized into three parts; corporate, personal, and capital gains. The last time all three were raised in the same year was 1993, sending stocks up 7%. The Government substantially expanded spending on social programs for lower income earners. It coincided with the beginning of the great bull market of the 1990’s. At that time, internet connectivity came about; corporations and individuals saw massive gains in productivity. The price of crude oil also went into a prolonged bear market, helping Americans to spend more money on personal consumption. 1968 was the only other time since 1950 when all three tax rates were raised; the stock market rose 8%.
The two years that saw the biggest stock market gains when tax rates were raised were 1991 (personal and capital gains rates), stocks rising 26%, correlating with the end of a recession and in 2013 (personal and corporate rates), stocks rose 30%, while the Federal Reserve was in its third round of Quantitative Easing.
The chart below illustrates this:
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I think it’s generally accepted by many that tax rates will be increasing under President-elect Joe Biden. But it is also expected that he will propose massive Government spending; one of which he outlined this week in the amount of 1.9 Trillion Dollars. And let’s not forget the 900 Billion Dollar stimulus that was approved by Congress last month. An infrastructure spending bill is also expected. Throw in the expected return to normalcy in our new post-pandemic economy, you have the underpinnings for a strong economy beginning sometime in the back half of this year. Will that necessarily translate into strong stock market performance this year, if Biden gets his tax increase? We can only wait and see. But big government spending that is at least partially paid for by tax increases could keep the correlation going for another round.
Best,
Mitch
Check out these two videos, below:
- Robinhood: Good vs Evil (the app that uses social engineering to get you to trade more than you should)
- Hitting the Live button: Bitcoin, Beneficiary Designations, and Elon Musk's "Signal"
These are from my live stream, Be the Boss of Your Money, every Monday through Thursday on YouTube, LinkedIn, and Facebook, which you could also watch in replay.
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Thanks!
Mitch
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I opened ClientFirst Strategy, Inc. because I believe that the only way to help my clients potentially achieve their goals is by offering unbiased advice & investment management expertise. To my clients, thank you for your continued vote of confidence. If you are not a client but would like to explore the possibility of becoming one, I invite you to call me directly, visit my website, join my email list, and/or connect with me on social media.
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Mitchell O. Goldberg
AIF®, AAMS
President | Investment Professional
OSJ Manager
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ClientFirst Strategy, Inc.
290 Broadhollow Road, Suite 200 E, Melville, NY 11747
(D) 631-920-6622 (F) 631-920-6624 (C) 516-818-0338
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. The S&P 500 and Dow Jones Industrial Average are indexes. It is not possible to invest directly in an index. *The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. **The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Securities and investment advisory services offered through NEXT Financial Group, Inc., member FINRA/SIPC. ClientFirst Strategy, Inc. is not an affiliate of NEXT Financial Group, Inc.
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