Daily Comment (April 23, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning all! U.S. equities are expected to open higher this morning as optimism grows over a potential infrastructure package.  We have a full slate of news to cover today.  The report will start with a discussion on Biden’s tax proposal.  International news follows, with Russia withdrawing from Ukraine, Israel objecting to nuclear talks, and more.  Economics and policy are up next, with an examination of the Republican counteroffer to the infrastructure bill.  China news follows, and we will close with our pandemic coverage.

Tax proposal: The White House announced a plan to increase the capital gains tax from 20.0% to 39.6% for taxpayers with adjusted income greater than $1 million.  The additional revenue will aim to help fund the Biden administration’s social spending programs and partially help fund Obamacare.  The plan is expected to receive some backlash from Republicans who fear the tax could lead to a reduction in investment and employment.  Because it is unlikely that any Republican would support the bill, President Biden would likely need to rely on his slim majority in both the Senate and House to get the tax increase passed through Congress.  The two possible holdouts that could stop the proposal from becoming law are Senator Kyrsten Sinema (D-AZ) and Senator Joe Manchin (D-WV).  Earlier this month, Manchin balked at a proposal that would raise the corporate tax rate from 21% to 28%.  In addition, the proposal would still need to be passed through budget reconciliation in order to avoid being filibustered.  Given the extreme jump in the tax rate, we suspect the bill has a moderate chance of passing.

Although the increase in the capital gains tax doesn’t come as a surprise, the scale of the rise has caught many investors off guard.  When news broke of the potential tax hike, stocks sold off immediately.  On its face, this proposal does appear to be bearish for equities, but that may only be true leading up to its implementation.  Before the implementation of higher capital gains taxes, investors can maximize profits by selling their most profitable holdings before the new tax is implemented.  It will likely hurt the tech sector disproportionately as it has seen the most significant gains over the last decade or so.  After its implementation, investors will tend to be incentivized to hold onto stocks for a longer period.  This may reduce market volatility and short-term trading behavior.  Historically, capital gains changes have adversely affected stocks the year before implementation, but less so afterward.  At the same time, there is a modest tendency for higher capital gains rates to reduce market multiples.

International news:  Israel objects to restoring the nuclear deal, Russia withdraws from the Ukraine border, and more.

  • Israeli Prime Minister Benjamin Netanyahu has instructed his delegation to object to the strategic talks between the U.S. and Iran. Israel believes that Iran is a threat to its national security and would like the U.S. to walk away from discussions.  PM Netanyahu took a similar position in 2015, but his objection fell on deaf ears.  The delegation is expected to inform Washington that it will not abide by any agreement and would be willing to engage in military operations against Iran alone if it feels that its national security is threatened.
  • Russia has agreed to withdraw its military from the Ukraine border by May 1, according to state media. The decision has allowed Ukraine to breathe a sigh of relief as the move appears to mark a de-escalation between itself and Russia.  The buildup of Russian troops along the Ukraine border led many to fear a possible invasion.  However, there is some speculation that the action was a way to gauge the West’s future response if Russia decided to invade.
  • Denmark is the first European country to begin revoking residents’ permits from some Syrian refugees. The move comes as hostilities within Syria have moderated.  As a result, some places that were considered dangerous are now deemed safe.

 Economics and policy: The Republican infrastructure bill, self-driving cars spark concerns, D.C. statehood.

  • Senate Republicans introduced a $568 billion infrastructure package on Thursday. The bill defines infrastructure more narrowly than the $2.3 trillion plan proposed by the White House.  It includes funding for roads and bridges, rails, public transit, airports, and broadband.  Although many Democrats have called the plan too small, the White House has stated that it would welcome “any good-faith effort by the Republicans.”
  • Consumer Reports, a nonprofit organization, has stated that it could “easily” trick the autopilot feature in a Tesla (TSLA, $719.69) vehicle. In a test conducted this week, engineers were able to trick the Tesla vehicle into believing someone was operating it by placing a small weighted chain on the steering.  The engineer reported that at no time did the vehicle signal it was aware that there was no driver in the driver’s seat.  Tesla’s autopilot feature has come under scrutiny after two men were killed in a Tesla sedan last week.  Although it isn’t clear whether autopilot was to blame, authorities claimed that no one was in the driver’s seat when they recovered the vehicle.  Following this report, two senators have called for a probe into Tesla regarding the recent crashes.
  • Voting along party lines, the House passed legislation that would make Washington, D.C. the 51st state. The legislation would give the city one representative and two senators.  Despite the Democrats’ majority in the Senate, the bill is not expected to pass.

 China:  Rising tensions with Australia, China’s target of terrorist attacks, and the PBOC targets Ant Group.

  • Tensions between Australia and China continue to escalate after Australia canceled two accords between Victoria State and China’s Belt and Road Initiative. PM Scott Morrison claimed the move was designed to prevent local governments from straying away from the federal government’s foreign policy of promoting a “free and open Indo Pacific.” Australia has implemented a new policy that forces states to consult with the foreign ministry before signing agreements with foreign nations.  China has criticized the move as part of a larger plot by the West to contain it and warned Australia to end its “cold war mentality.”  China has struggled to punish Australia as it heavily relies on the country’s iron ore.
  • A suicide bombing in Pakistan is being investigated after it appears to have targeted a Chinese ambassador. The attack in the western province highlights growing resentment of China’s Belt and Road Initiative.  Groups have complained that China is draining their country of its natural resources.  The Pakistani Taliban has taken credit for the attack.  As the U.S. withdraws from the Middle East, it is becoming clear that China may be forced to fill the void; the region now poses a greater geopolitical risk.
  • Beijing has ramped up its fight against Jack Ma by asking Ant Group to turn over its consumer lending data to the People’s Bank of China (PBOC). Ant Group’s data is one of its most valuable assets and is the core of its business model.  The PBOC wants access to this data in order to better assess the creditworthiness of consumers.  The move comes during a time in which China is struggling to contain an increase in consumer defaults.

COVID-19:  The number of reported cases is 144,217,276 with 3,064,345 fatalities.  In the U.S., there are 31,903,230 confirmed cases with 569,928 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 282,183,915 doses of the vaccine have been distributed with 218,947,643 doses injected.  The number receiving at least one dose is 135,791,031, while the number of second doses, which would grant the highest level of immunity, is 89,245,776.  The FT has a page on global vaccine distribution.  The weekly Axios map shows rising cases in about half the country.


  • The health effects from contracting COVID-19 can potentially last much longer after a person has recovered. A study released from the journal Nature looked at the effects of COVID-19 on patients from the Veterans Health System.  According to the study, patients suffered from chronic diseases that stretch beyond just the respiratory system.  There have been cases of neurological, cardiovascular, and gastrointestinal problems following the diagnosis.  Additionally, patients who were suffering from chronic conditions before contracting the virus have seen their symptoms worsen.
  • A study by Epic Health System showed that only 0.4% of the people who contracted COVID-19 were reinfected within the next 90 days. Before this study, doctors were largely unsure whether it was possible to contract the virus twice.  The finding in this study will likely relax concerns of a never-ending pandemic, and it raises the possibility of the country eventually achieving herd immunity.
  • Health officials are expected to resume administering the Johnson & Johnson (JNJ, $165.18) vaccine as soon as this weekend on the condition that it comes with a warning. The vaccine was suspended earlier this month over concerns that it might be linked with severe blood clotting.  The resumption of the vaccine is unlikely to come with an age restriction.
  • The latest wave of COVID-19 cases may have already peaked in the EU as cases have been declining across the bloc. Although France and the Netherlands still have cases well above the EU average, the decline is a welcome sign as more people are vaccinated.
  • California now has the lowest per capita COVID-19 infection rate in the country after being one of the hardest-hit states at the start of the year. There may be several reasons for the decline, ranging from an estimated 40% of the population has contracted the virus already to lockdown restrictions, but there is no definitive answer.  That being said, the steep decline has led to a reopening of businesses and restaurants throughout the state.

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