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The stock market records that President-elect Joe Biden will inherit from President Trump is at risk of a post-day liquidation of ownership, according to Wall Street strategists.
Tax hikes and a significantly improving economy, leading to higher interest rates, are concerns that could become driving forces for markets later this year.
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“The post-opening fix is probably related to peak policy, earnings and positioning,” wrote Michael Harnett, chief investment strategist at Bank of America.
The S&P 500 grew at an annualized rate of 13.73%, or 67.26%, during Trump’s term, the index’s third largest annualized gain under a president, with investors celebrating tax cuts and reversing regulations. The benchmark, which set 150 records under Trump, ended 0.6% below its all-time high on Tuesday, the last trading day of his term.
The Nasdaq Composite Index, in turn, showed an annualized return of 24.17%, the highest under a president since its debut on the stock exchanges in 1971, during the Nixon administration. The high-tech index set 183 records during Trump’s four years at the White House.
“Market prices are perfect,” said Greg Valliere, chief policy officer for US policies at AGF Investments, based in Toronto, which has $ 38.8 billion in assets.
Biden pledged to increase the main corporate tax rate to 28% 21%. The fee was reduced as part of Trump’s tax cuts and jobs Act, which also encouraged American companies to bring home $ 1 trillion in cash abroad.
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Other tax changes being considered are the increase in the tax rate on capital gains and dividends to 43%, from 24%, and also the increase in income tax for those who earn more.
In addition to higher taxes, investors must address the implications that a booming US economy will have on interest rates.
Goldman Sachs economists predict that the US gross domestic product will grow at an annual rate of 5% in the first quarter of 2021 and at a rate of 5.8% in the year, driven by the $ 900 billion COVID-19 relief package. recently approved. The economy could grow at an even faster pace if Congress passed Biden’s $ 1.9 trillion package last week.
A model from the Federal Reserve Bank of Atlanta that takes into account recent economic data shows that the economy probably grew at an annualized rate of 7.4% during the fourth quarter of last year, after growing at a record pace of 33.4% in the third quarter, as companies began to reopen after COVID-19 blocks.
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Enthusiasm about the economic recovery caused nervousness in the bond market, where the sale of U.S. Treasury bonds resulted in a 10-year yield increase from 0.515% on August 4 to X% on Tuesday. The recovery came despite the Federal Reserve reiterating its promise to keep interest rates close to zero until at least 2023.
Valliere said he “would not be shocked” to see 10-year income reach 1.5% in the summer and warns that yield close to 2% would be a “concern for the stock market”, which saw an unforgiving offer fueled by the Fed’s promise to keep rates low and talk about additional fiscal stimulus from the Congress.
The S&P 500 price / earnings index is currently trading at 27.4, compared to its historical average of 17.6 since 2000, according to Dow Jones Market Data.
The options market is “aiming for even higher prices,” said Anthony Saliba, CEO of the Chicago-based Matrix Execution Group, an executive broker specializing in options and stocks. “There is more demand for calls than supply.“
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The preference to have call options over put options indicates that investors are choosing not to buy protection, which is usually done to avoid a downward movement.
Saliba, who has been betting against the market since the week after the election when entering and exiting positions, admits that there is nothing to indicate an impending reversal in the stock market, but is still looking for a lower sharp movement.
“I think you go through ownership, you see the internal struggles between the Democratic Party and then I think people say, ‘Maybe I better make some profits,'” said Saliba.