Unfortunately for Wall Street, stocks are moving to the downside on Thursday afternoon. This has spurred many investors to ask: “Why did stocks drop today?”
Well, it appears one significant catalyst is at fault for today’s move. Specifically, a Bloomberg report that President Joe Biden is going to propose higher capital gains taxes on the wealthy is providing a negative catalyst.
Investors with large portfolios with capital gains on their books may be enticed to sell sooner than expected on this news. After all, taking money off the table is expensive as it is. Doing so at a tax rate that’s double today’s rate? That’s something investors won’t want to do.
Let’s dive deeper into the details of what’s being proposed for investors concerned about today’s drop.
Why Did Stocks Drop Today? Taxes.
Biden campaigned on a promise to tax the rich to give back to the lower and middle class. He’s seemingly set to follow through on his promise.
Today, Bloomberg announced that Biden plans to raise the capital gains tax rate from the existing base 20% level to as high as 43.4% for the wealthy. This approximate doubling of the capital gains tax rate has spooked investors, with all three major indices trading around 1% lower at the time of writing.
Stocks were mainly flat earlier in today’s trading. This sharp move to the downside came seemingly as a direct result of this announcement. Accordingly, investors appear to pricing in this news rapidly today.
The extent to which stocks will continue to drop over the near term remains to be seen. However, the sharp upward move equity markets have made in recent months has priced in a lot of growth already. The extent to which markets are overvalued is another topic of concern for many investors today. Taking some money off the table at a lower tax rate may seem to be appropriate, particularly for wealthy individuals with large holdings.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.