The last week of April will be a busy one for stocks, with a Federal Reserve meeting, and a flood of earnings data. Inflation and taxation will remain hot topics in economies. President Joe Biden is set to unveil his “American Families Plan” and the tax hikes needed to fund it, which would include a significantly larger capital gains tax on the rich. The initiative, which is the second instalment of his Build Back Better agenda, would include additional budget plans targeted at assisting families. Wednesday evening, the president addressed a joint session of Congress. This week is a big one for earnings, with about a third of the Standard &Poor 500 publishing, including Big Tech names including Apple, Microsoft, Alphabet, and Amazon.
Firms such as Boeing, Ford, Caterpillar, and McDonald’s are expected to outline the cost challenges they are facing, as a result of increasing goods and shipping prices, as well as supply chain disturbances, as many others have already done. Simultaneously, the Fed is required to justify its stance of allowing inflation to run wild, while assuring investors that the price increase is only temporary. The Fed meets on Tuesdays and Wednesdays.
The central bank takes centre stage
“I believe the Fed will like not to be a feature next week, but the Fed would be pulled from the backdrop due to inflationary concerns,” said Diane Swonk, chief economist at Grant Thornton. The Fed is unlikely to make any policy changes, but Fed Chairman Jerome Powell’s press conference after the meeting on Wednesday would be closely watched. So far, the onslaught of earnings reports has been mostly favourable, with 86 percent of businesses posting earnings beats. According to Refinitiv, corporate earnings are forecast to increase by 33.9 percent in the first quarter based on forecasts and real data. Revenues are up around 9.9 percent. The Fed’s favoured inflation gauge is announced on Friday, which is critical inflation info. The personal consumption expenditure report is forecast to show a 1.8 percent increase in core inflation, which is also less than the Fed’s goal of 2%. Other data releases on Thursday include the first-quarter gross domestic product, which is estimated to have increased by 6.5 percent, according to Dow Jones.
“I don’t believe the Fed is under any pressure to change monetary policy at this point,” said Ian Lyngen, BMO’s head of the U.S. rates strategy. “The Fed must recognise that the data is changing. We had a successful first quarter.” “The Fed must recognise this while continuing to maintain incredibly accommodative policy, so they must make a note of the reality that the simple policy is warranted”, he said. According to Lyngen, the Fed will undoubtedly point to continuing global worries about the pandemic as a possible danger to the economy’s recovery. Powell is also likely to reiterate that the Fed would allow inflation to climb past its 2 percent goal for a period of time, before raising rates in order to give the economy more time to recover. “It will be a challenge for the Fed,” Swonk predicted. Because of the contrast to a poor time last year, the base effects over the next few months would make inflation seem to have risen sharply. Swonk added that the consumer price index for April may be more than 3%, up from 2.6 percent last month.
“The Fed is attempting to get a lot of people out on the dance floor before calling ‘last call,’” she said. “What Powell has been arguing from day one is that if we take care of those on the edges and get them back into the labour market, the rest will take care of itself.” Stocks have fallen marginally in the last week, though Treasury rates have remained low. The 10-year yield, which goes in the opposite direction of interest, was 1.55 percent on Friday. The Standard&Poor 500 fell 0.1 percent to 4,180 at the end of the week, while the Nasdaq Composite fell almost 0.3 percent to 14,016. The Dow Jones Industrial Average was down just under 0.5 percent at 34,043.
Prospects for tax increases
Stocks fell sharply on Thursday after a press article stated that Biden is set to propose a 39.6 percent capital gains tax rate for those making more than $1 million per year. The proposed levy, when combined with the 3.8 percent net investment income tax, would more than double the long-term capital gains rate of 20 percent for the wealthiest Americans. According to strategists, Biden is likely to consider raising the income tax limit on those making more than $400,000.
“I think a lot of people are beginning to price in the chance of a substantial rise in both corporate and capital gains taxes,” Lyngen said. Companies have not offered any commentary on the planned increase in corporation taxes to 28 percent from 21 percent, although they have discussed other expenses. DWS’s chief investment strategist for the Americas, David Bianco, believes that bigger firms would do better than smaller ones in grappling with supply chain restrictions. He also believes that Big Tech would do better through the semiconductor crisis than automakers, who have already declared production shutdowns.
“It’s innovation week next week.’’ “I believe we will fall to our knees in awe of their business strategies and their potential to expand on a massive scale,” Bianco predicted. He said that he is opposed to Wall Street’s common trade into cyclicals and out of expansion. He is also in favour of expansion. “We’re overweight equities and we’re worried about rising interest rates,” Bianco said. “I’m not optimistic in the sense that I expect the market to climb significantly from here.” “We stuck with growth and dove deeper into bond replacements, infrastructure, staples, and real estate,” he said, adding that he is underweight in industrials, oil, and materials. “The energy industry is doomed. It is being nationalised by legislation. I like industrials because they are well-run businesses, but I believe that capital investment demands for traditional infrastructure are too high.”
Bianco said he likes big box supermarkets, but smaller outlets are facing significant problems that existed prior to Covid. He is also drawn to independent biotech companies. “I am a fan of healthcare stocks. Those prices are fair. Since 1992, people have become paranoid of lawmakers stomping on them. They get by, and lately they’ve been delivering,” he added.
