Trump-Harris Debate Has Important Stock Market Ramifications
Presidential debates don't usually have a clear-cut impact, but this time there's an issue that is extremely important to the stock market.
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The market bounced on Monday, but it was what technicians call an "inside day" and did little to convince investors that a major turn was about to occur. Market participants are nervous about the CPI report that is due on Wednesday, the Federal Reserve interest rate cut, which will be announced next week, the strength of the economy, and the Presidential Debate on Tuesday night.
Presidential debates don't usually have a clear-cut market impact, but this time, there is an issue that is extremely important to the stock market. That issue is a proposed tax on the unrealized capital gains of very wealthy investors.
Many extremely rich investors avoid paying capital gains tax by borrowing money that is collateralized by their stock holdings. The stock is eventually transferred to their heirs, and under the tax code, the cost basis is stepped up to the fair market value at the date of death. Hence, there are no capital taxes ever paid on those gains, although there will be inheritance taxes.
Kamala Harris is proposing that these high-net-worth individuals be forced to pay taxes on their appreciated investment holdings even before there is a sale. Someone like Jeff Bezos or Bill Gates, who own stock in companies they founded, has many billions of unrealized capital gains. They would have giant tax bills if they were suddenly forced to pay capital gains taxes on these unrealized profits.
Supporters of a tax on unrealized capital gains defend this proposal by claiming that it only impacts a very small number of extremely wealthy people. However, even if you dismiss the likelihood that it would eventually be expanded to impact a greater number of people, the problem is that this tax could have a potentially disastrous impact on the stock market.
Although only a very small number of very rich people would pay the tax, these people own a substantial percentage of the market. They would be forced to sell stock to pay these taxes and, in the words of the Wall Street Journal, it would "crush the US stock market, grind initial-public offerings to a halt, and hit you in the 401(k)."
Many supporters of Kamala Harris claim that such a tax would never become law, so it's really not important, but it comes across as hostile to the capital markets. For some Democrats, taxes on high net-worth individuals are more important than capital formation. The goal is economic equality rather than economic growth.
If Donald Trump is a clear winner of Tuesday's night debate, then this issue goes away, and the market will likely feel some relief. There are many other economic issues that will be impacted by the election, but this is a big one, and it is clear where the two candidates stand.
The debate and other upcoming economic news are likely to keep the market in a trading range for now. There is some positive rotational action out of the Magnificent Seven and into other areas of the market, but we are currently undergoing a correction, and there are no clear signs of a bottom at this point.
We have some negative action in the early going as Monday's bounce is already fading.
At the time of publication, Rev Shark had no positions in any securities mentioned.
