Stock Market Today: Threat of Capital Gains Tax Hike Thumps Stocks

A Thursday report that President Biden was set to propose a capital gains tax increase on the wealthiest Americans short-circuited optimism over jobs progress.

The IRS building in Washington, D.C. Bloomberg reports that President Biden will propose a hike to the capital gains tax
(Image credit: Getty Images)

After three days of placid macroeconomic news, the markets swung on a pair of big announcements Thursday – good news on the labor front, but bad news for wealthy Americans paying capital gains taxes.

Earlier in the day, investors were encouraged by another drop in weekly unemployment filings. Initial jobless claims for the week ended April 17 dropped by 39,000 to a recovery-era low 547,000.

"Altogether, the sharp decline in the rate of job separation is consistent with an improvement in labor market conditions, likely on account of progress on vaccinations and an easing of social distancing restrictions in many states," say Barclays strategists Michael Gapen and Pooja Sriram.

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However, the market took a sharp turn lower in the afternoon after Bloomberg (opens in new tab) reported that President Joe Biden will propose roughly doubling the capital gains tax rate (opens in new tab) for Americans earning at least $1 million to 39.6%.

This proposal, which would result in federal tax rates of up to 43.4% for the wealthiest Americans after also factoring in the Net Investment Income Tax, has been floated as a possibility for some time (opens in new tab), but Bloomberg's report was the most concrete indication yet that such a hike could be on the table.

The blue-chip indexes, which were on track to finish with modest gains to marginal losses, finished solidly lower. The Dow Jones Industrial Average declined 0.9% to 33,815, the S&P 500 lost 0.9% to 4,134 and the Nasdaq Composite fell by 0.9% to 13,818.

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Other action in the stock market today:

  • The small-cap Russell 2000 wasn't dinged up as hard, slipping 0.3% to 2,232.
  • U.S. crude oil futures clawed out a 0.1% gain to $61.43 per barrel.
  • Gold futures declined 0.6% to $1,782.00 per ounce.
  • The CBOE Volatility Index (VIX) rebounded 7.1% to close at 18.74.
  • Bitcoin prices sank by 4.8% to $52,967. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)

stock chart for 042221

(Image credit: YCharts)

Will a Capital Gains Tax Hike Weigh on Stocks for Long?

Not everyone agrees that the sky is falling. Some market watchers – such as Ben Carlson (opens in new tab), director of institutional asset management at Ritholtz Asset Management, and Dave Nadig (opens in new tab), CIO and Director of Research for ETFTrends and ETFdb – questioned, via tweet, how much impact capital gains taxes really have on stock market performance.

Others doubt such a tax can even pass Congress.

Gene Goldman, chief investment officer at Cetera Investment Management, cites three reasons he thinks Biden's pitch won't win in its current form: "1) This is a drastic tax change; 2) Republicans will not go along with it, and even some Democrats might not be on board, though they could be persuaded if the tax change includes a removal of the SALT tax cap; 3) Though the economic recovery is broadening, this could hurt this still-delicate recovery."

Still, even the mere proposal could keep the market in seesaw mode, once again emphasizing the psychological benefits of having blue-chip holdings you can trust. That includes blue chips like these 25 stocks selected for their elite balance-sheet strength (opens in new tab). But another way to sniff out solid blue-chip holdings is to eyeball the hedge fund space, where billionaires and other large-money managers' inexhaustible research resources sometimes point all these pros to the same high-quality holdings.

Here, we examine a couple dozen blue-chip stocks that are widely held among the hedge fund set and, in many cases, are high-conviction plays for notable managers.

Kyle Woodley
Senior Investing Editor, Kiplinger.com

Kyle is senior investing editor for Kiplinger.com. As a writer and columnist, he also specializes in exchange-traded funds. He joined Kiplinger in September 2017 after spending six years at InvestorPlace.com, where he managed the editorial staff. His work has appeared in several outlets, including U.S. News & World Report and MSN Money, he has appeared as a guest on Fox Business Network and Money Radio, and he has been quoted in MarketWatch, Vice and Univision, among other outlets. He is a proud graduate of The Ohio State University, where he earned a BA in journalism.