NEW YORK- Investors on Wall Street can add another layer of uncertainty to a market already unnerved by last month’s sell-off, stalled fiscal stimulus and President Donald Trump’s COVID-19 diagnosis, which weighed on stocks on Friday.
A higher capital gains tax that could accompany a win by Democratic presidential nominee Joe Biden is also emerging as a potential counterweight to this year’s powerful rally in stocks.
Biden has proposed taxing capital gains and dividends as ordinary income, which would increase the tax rate from 20 percent to 39.6 percent for individuals and couples earning over $1 million, the highest tax bracket.
That policy – which would likely be easier to enact if Democrats also win the Senate and retain control of the House – may push some investors to lock in gains ahead of December if Biden emerges the winner in the Nov. 3 vote, fund managers said.
Tax-motivated selling would likely be most pronounced in technology and other momentum stocks and could push the broad S&P 500 index lower between November and the end of the year, said Eddie Perkin, chief equity investment officer at Eaton Vance.
“If you have enough people looking to harvest gains, that has an impact on the stocks that have led the market, and the big tech stocks could be where people choose to sell at the end of the year,” he said.
On Friday, President Trump’s COVID-19 diagnosis triggered a sell-off in stocks and oil as investors moved away from risk assets. But many tech and momentum stocks are sporting healthy gains for the year despite a sell-off that pushed the S&P 500 down 3.9 percent in September, its first monthly loss since March.
Tesla Inc, for instance, is up 436 percent for the year through Friday, while Zoom Video Communications Inc is up 610 percent and Amazon.com Inc is up 74 percent. The S&P 500 index as a whole is up 3.8 percent over the same time.
That kind of momentum may be difficult to slow, especially if it is aided by seasonal trends.
November and December tend to be among the best months for stock performance, boasting an average gain of 1.34 percent and 1.57 percent, respectively, for the S&P 500, according to research firm CFRA. — Reuters