US stocks closed higher on the last trading day of the week as strong economic data outweighed investors’ fears of the capital gains tax hike proposed by President Joe Biden that would nearly double the tax rate for wealthy Americans.
All three major stock indexes rose Friday propelled by the two popular gauges of business activity that swung even higher in preliminary April readings, according to analytics firm IHS Markit.
The services activity index leaped to 63.1 from 60.4 – the fastest expansion since data collection began in 2009. The firm’s manufacturing index rose to 60.6 from 59.1, which is also a record. Markit’s composite index soared to an all-time high of 62.2 from 59.7. Readings above 50 indicate sector growth, while those below 50 signal contraction.
Ryan Detrick, chief market strategist at LPL Financial, said he was surprised by the market’s reaction to Biden’s proposal. He said investors should have expected it when Biden won.
“Calmer heads are prevailing today with the broad rally at least,” he said in a note. “On the surface, you’d think higher taxes wouldn’t be a good thing, but that’s actually not reality. In fact, the past two times we had an increase in the capital gains tax stocks did really well for the next six months in 1987 and 2013.”
Friday’s gains are a sharp rebound from Thursday’s drop when the markets were spooked after the capital gains tax hike was announced.
“The knee-jerk reaction to yesterday’s news that the Biden administration was interested in almost doubling the capital gains rate was a small selloff in the market,” Chris Zaccarelli, CIO at Independent Advisor Alliance, said in a note. “If the tax increase was actually implemented – as compared to just proposed – the selloff would have been greater.”
Zaccarelli added that the monetary and fiscal stimulus in the system should outweigh concerns over tax policy. But he also acknowledged that the market is relatively expensive by most metrics at this point, which leaves it susceptible to pullbacks, especially when unexpected news arrives.
However, analysts at Goldman Sachs said that congress is likely to settle on a much more modest increase in capital gains tax than Biden would like with the eventual figure likely to land at around 28%.
In bond markets, the 10-year Treasury note rose 1.561% from 1.554% the day prior.
“Since the end of March, we’ve seen a retrenchment of that move as the stock and bond markets have unwound some of those moves,” Zaccarelli said.
Here’s where US indexes stood at the 4:00 p.m. ET open on Friday:
In cryptocurrencies, bitcoin slid below $50,000 with $260 billion wiped off the crypto market as Biden’s tax proposals crushed risk appetite. Bitcoin’s weakening momentum has helped contribute to a swift 24% decline from its record high of nearly $65,000 over the past week.
“It is clear that bitcoin is more sensitive to capital gains tax threats than most asset classes,” Jeffrey Halley, a senior market analyst at OANDA, said.
“There’s no connection between inflation and bitcoin,” Taleb told CNBC, adding that everyone knows bitcoin is “a Ponzi.”
Oil prices were steady Friday as Covid-19 concerns, especially in India, rose to new highs. West Texas Intermediate crude rose 1.22% to $62.18 per barrel. Brent crude, oil’s international benchmark, was also up by 1.13% to $66.14 per barrel.
Gold slipped by 0.97% to $1,776.51 per ounce on strong economic data.