- President Biden’s proposed capital gains tax hike could weaken the stock market in the short-term, according to Goldman Sachs.
- However, in the long-term, stocks have trended higher six months after previous capital gains tax hikes, Goldman said.
- “We estimate $1+ trillion in unrealized capital gains for the wealthiest US households, but also large cash balances that should support equity demand,” Goldman said.
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Stocks initially sold off 1% last Thursday after news broke that Biden will propose nearly doubling the capital gains tax rate to 39.6% for those making more than $1 million annually, but those losses were recovered on Friday.
That’s the type of market action investors should expect if the tax proposal does pass: an initial sell-off followed by a longer-lasting rally.
Kostin’s analysis of previous capital gains tax hikes found that S&P 500 declines tend to materialize prior to the capital gains tax hike as those impacted lock in their gains at a lower rate, but those declines are short-lived.
“The trend of net equity selling and falling stock prices around capital gains rate changes has usually been short-lived and reversed during subsequent quarters,” Kostin said.
Goldman estimates that the wealthiest households own $1 trillion to $1.5 trillion in unrealized equity capital gains, or about 3% of the total US equity market cap.
But when the capital gains tax increased in 2013, “although the wealthiest households sold 1% of their assets prior to the rate hike, they bought 4% of starting equity assets in the quarter after the change and therefore only temporarily reduced their equity exposures in order to realize gains as the lower rate,” Kostin explained.
And stocks can still go higher with US households sitting on a meaningful pile of cash, with net equity buying by households totaling $350 billion in 2021. That buying will be driven by the wealthiest 1%, according to Goldman, continuing a decades long trend.
According to Goldman, the top 1%, which accounts for 53% of household equity ownership, has bought $2 trillion of shares over the past 30 years compared to $800 billion in net selling by the bottom 99%.