October 12, 2020 BARRON’S 7
UP & DOWN WALL STREET
The Cboe VIX index, the so-called stock market
fear gauge, fell to under 25 from near 30 at the
end of the previous week.
Nothing Seems
To Worry the Stock
Market These Days
election fight while counting what will
be a mountain of mailed-in ballots. Sim-
ilarly, some sort of fiscal largess from
Washington was expected, albeit proba-
bly not before Election Day, after
Trump reversed his opposition to nego-
tiations on a spending package. That
opposition had briefly sent the market
tumbling earlier in the week.
The boost provided by the $2.3 tril-
lion Cares Act, enacted earlier this
year, should produce 35.2% annual-
ized growth in U.S. gross domestic
product in the third quarter, according
to the Atlanta Fed’s GDPNow model,
which would follow the record 31.7%
contraction in the second quarter. But
growth in the current quarter is likely
to slow sharply, perhaps to 3% or less,
without many of the income supports
from the previous stimulus.
The lessened political and economic
concerns were evidenced in the options
market by a sharp decline in the Cboe
VIX index, the so-called stock market
fear gauge. It slid under 25 from near
30 at the end of the previous week.
Perhaps even more telling: VIX futures
contracts for November andDecember
also receded sharply, reflecting less
anxiety over a contested election result.
As those worries were assuaged,
the long end of the Treasury market
saw a rise in yields. The 30-year bond
yield moved up to 1.574%, a four-
month high, as riskier assets held
greater allure. The market for Trea-
sury inflation-protected securities, or
TIPS, also is pointing to rising infla-
tion expectations of 1.853%, the high-
est since September 2019 and just 15
basis points away from the 2% target
the Fed is aiming for and seeks to top,
according to Tradeweb.
The uptick in yields elicited torrents
of inflows into fixed-income funds—
some $25.9 billion in the latest week,
the second-biggest total on record,
according to Bank of America Global
Research, reflecting investors’ quest for
interest income while money-market
rates are stuck at zero. That dwarfed the
$4.4 billion inflows into equity funds.
Stocks don’t seem upset by the pros-
pects of higher taxes proposed by for-
mer Vice President Joe Biden, includ-
ing taxing capital gains at higher
ordinary-income rates. Under the
Democratic tax proposal, capital gains
could be taxed at a top rate of 43.4%,
up from the current peak of 23.8% (in-
cluding the Medicare surtax on invest-
ment earnings of upper-income tax-
payers). That doesn’t include state
capital gains taxes, which generally
already are levied at the same rate as
on ordinary income.
Based on the history of previous
capital-gains tax hikes in 1986 and
2012, J.P. Morgan strategist Nikolaos
Panigirtzoglou writes in a research
note that U.S. equities’ prices could
suffer by about 5%. Tax-optimization
strategies would result in one-off asset
selling to realize a lower rate on gains.
Assuming that a Democratic tax plan
were to take effect on Jan. 1, 2022, the
selling pressure would be felt in the
fourth quarter of 2021.
As for the longer-term effect of a
higher capital-gains tax rate, empirical
evidence is mixed, and most economic
models don’t show a large impact on
economic growth, adds Panigirtzoglou.
Indeed, given current low interest
rates and higher returns from equi-
ties, relative to bonds, the impact from
an increase in capital-gains taxes on
stocks may be more muted than in the
past, he concludes.
I
f you’ve been watching too much
financial cable news while work-
ing from home, it’s unlikely
you’ve missed commercials aimed
at folks who harbor distrust in the
paper currency in their back pockets.
One long-running campaign flogs gold
coins to graybeards like me, while
another ad touts cryptocurrencies to
Gen-Z types trading in front of their
screens in a ski cap.
A more sophisticated version
comes from regular forecasts of the
dollar’s demise. Owing to Americans’
profligacy in consuming more than
they produce, not saving enough, and
borrowing too much, the U.S. runs a
chronic deficit in its international ac-
count. The nation’s citizens get away
with it only because they enjoy the
“exorbitant privilege” of issuing dol-
lars, the world’s preferred medium of
By Randall W.
Forsyth
Under Democratic
presidential
candidate Joe
Biden’s tax plan,
capital gains could
be taxed at a top
rate of 43.4%, up
from the current
peak of 23.8%.
Most economic
models don’t show
a large long-term
impact on economic
growth from a
higher tax rate.
M
aybe the bar-stool bet-
tors were right all along.
Stocks just go up.
Expectations for ad-
ditional fiscal stimulus
helped lift the major
U.S. averages about 4%
in the latest week, bringing them
within about 3% of their early-Sep-
tember peaks. But the bullish narra-
tive also suggested that the V-shape
economic recovery was sufficiently
robust to continue to lift the market,
even without further fiscal actions.
If that sounds vaguely familiar,
think back to around 2010 and the
debate over monetary policy. If the
economy stumbles, the Federal Re-
serve will ease and stocks will go up,
the thinking went then. And if the
economy is doing well enough not to
need a lift from the Fed, stocks go up.
The prospects for the Nov. 3 elec-
tions similarly are seen as a plus for
stocks. Increasing odds in public-
opinion polls and betting markets of a
so-called Blue Wave, with Democrats
winning the White House and the
Senate, while retaining control of the
House of Representatives, were
viewed as bullish. That’s a reversal of
the previous perception that President
Donald Trump and a GOP Senate
were better for business.
Of course, nobody has forgotten that,
at this time four years ago, the polls and
betting markets confidently were pre-
dicting that Hillary Clinton would
cruise to an easy victory. And a lot can
still happen in the next 3½ weeks.
The increased chances of a decisive
outcome in next month’s vote substan-
Olivier Douliery/AFP/Getty Imagestially reduced fears of a prolonged post-