International Communique No. 289 – 27th April 2021


The climate has remained supportive for risk assets despite the continuing hardship resulting from the pandemic. Some concerns exist about the economic impact of the state of emergency declared in Japan in response to the sharp local increase in COVID cases, barely months before the Olympic Games are due to go ahead. Nevertheless, most macroeconomic data in Europe and the US point to a solid recovery. US GDP for the first quarter of 2021 is expected to increase by 5.6% on a 12-month basis, streaking past the 4.3% reported for Q4 2020. In addition, the earnings and guidance numbers posted by most large companies for the first quarter of 2021 have been solid. So far, roughly one-quarter of S&P 500 companies have reported their figures, of which 84% posted earnings in excess of consensus estimates.

Last week investors suddenly cried wolf, shaken by Joe Biden’s proposal to raise the rate of capital gains tax from 20% to 39.6% on those earning more than USD 1 million a year. In total, the tax take on their investment gains would rise to 43.4%, which could make fine-tuning more expensive in the long term and have repercussions on overall valuations. But every time the White House announces more tax pressure for investors, such as this mooted increase in capital gains tax, or for companies, in the form of higher corporation tax, Wall Street plays scare tactics, sending stocks down sharply. But a few weeks later, we can see that the damage is not long lasting. On 31 March, the Biden administration proposed raising corporation tax from 21% to 28%. Since then, the S&P 500 has risen by 5.6% and the Nasdaq by 7.5%. Historically, there has been neither a lasting dampening effect on stock performance nor a correlation between the level of capital gains tax and equity valuations. Moreover, it is unlikely that such a plan will pass through Congress as it stands, as some Democrats and most Republicans are opposed to it. A trade-off will be needed, resulting in a final rate somewhere below 30%.

The main event this week is the Fed monetary policy meeting, where a policy hold is expected. The Fed has reiterated its intention to leave rates at zero until 2023 despite rising bond yields and projected 6.5% GDP growth this year. Fed Chief Jerome Powell is keeping a close eye on the job market, stressing repeatedly that 8 million jobs were lost during the pandemic and the wage gap has widened.

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