Stocks might suffer if a Democrat ‘blue wave’ brings higher capital gains taxes, but any pain will be brief, JPMorgan says

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  • Stocks could suffer in the near term if a Democrat “blue wave” in November brings a higher capital gains tax rate in 2022, but any impact would be brief, JPMorgan said on Friday.
  • If a higher rate comes into effect on January 1, 2022, there could be some downward pressure on equities in the fourth-quarter next year.
  • But once the new rate takes effect, stocks will likely resume an upward march, just like they did in 1987 and 2013, the bank’s strategists said.
  • Under Biden’s proposal, the maximum tax rate for long-term capital gains could rise to 39.6% from the current level of 23.8% 
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A Democratic sweep in the November elections would push the US capital gains tax rate up by 2022, but any impact on equities would be short-lived, according to JPMorgan.

Markets are increasingly pricing in a “Blue Wave” victory, one in which Joe Biden emerges as the presidential winner and the Democratic Party would be handed control of the Senate, as well as retaining control of Congress.

That would suggest an increase in taxes for wealthy Americans, including capital gains.

If a higher rate on capital gains comes into effect on January 1, 2022, there would be some downward pressure on equity markets in the fourth-quarter of 2021, strategists led by Nikolaos Panigirtzoglou said in a noted dated October 9.

But once the new tax rate takes effect, stocks are likely to resume an upward trajectory, similar to the trend seen in the first halves of 1987 and 2013 after hikes on some capital gains, they said.

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“Longer term, we see little impact from a prospective capital gains tax rate increase on risk taking and investors’ attitude toward equities as an asset class, given the current low yield and high equity risk premium environment,” JPMorgan said.

Under Biden’s proposal, the maximum tax rate for long-term capital gains could rise to 39.6%, from the current level of 23.8% 

With polls suggesting President Donald Trump’s reelection prospects look bleak, Wall Street is pivoting to the implications of a Democratic sweep that could pave the way for the party to make big changes to policy.

JPMorgan predicts there could be tax-related equity selling equal to about $200 billion, due to the prospective increase in capital gains tax. That could knock about 5% off US stocks – similar to the level seen in 1986 and 2012.

“But such pressure is likely to be temporary and once the new capital gains tax rate is introduced, the equity market would likely resume its uptrend in even stronger manner,” the bank’s strategists wrote.

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