Not a fluke
We’re continuing to see improvement in the employment market as last week’s unemployment claims came in at a new pandemic-low of 547k and well below economists’ expectations of 603k. The outlook is even more promising as companies are looking to resume hiring at a normal pace this summer as reopening continues with the better weather and vaccine distribution running at ~3m doses per day.
Moral of the story: This report confirms last week’s numbers weren’t driven by a one-time issue and it seems like we’re making some great strides in regaining employment. We still have to keep chugging along though given ~8m fewer people are employed today vs pre-COVID.
The Biden administration announced (something they widely publicized during the campaign so shouldn’t be a surprise tbh) a proposal to double the capital gains tax to 39.6% for people earning over $1m. Given this was publicized during the campaign, the Tax Policy Center has already published an analysis of the impact – the capital gains taxes would raise $370b over the next 10 years, which doesn’t really move the needle on the trillions of debt, which only increased after all the pandemic stimulus.
Moral of the story: Markets reacted pretty negatively to this news hitting the wire, which surprised me for two reasons – first, like I mentioned, this was a campaign promise (imagine an elected official delivering on campaign promises…*gasp*) and, second, the market didn’t react like this when the corporate tax rate increases were announced a few weeks ago, which are expected to raise twice the tax revenue from these capital gains tax increases. Honestly the chances of this passing in the current form seem pretty slim, I guess we shall wait and see…
Earnings so far
As of Friday, about 20% of the US companies have reported earnings for the quarter, and most of them have exceeded Wall Street analysts’ estimates. So far, earnings are indicating 63% growth compared to last year. Despite the strong earnings we’re seeing, stocks actually ended flat for the week, which would indicate most of this positive news was already priced into stocks given the new highs we’ve been testing over the last few months.
Moral of the story: This muted reaction to strong earnings is something we’ve seen in the last two earnings seasons. Stocks rally ahead of earnings as investors get excited about the reopening. With expectations high, companies have to hit the ball out of the park and literally into space for the stock to react positively after the earnings releases. May is seasonally a tough quarter for stocks anyway and these new highs and elevated expectations make the market ripe for pullbacks – two of the most obvious risks would be a hiccup in our battle against COVID (i.e. some new strain that can’t be addressed with the existing vaccines) or regulatory risks (i.e. elevated taxes being proposed by the Biden administration).