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According to Wall Street strategists, the record-breaking stock market that President Joe Biden will inherit from President Trump is in danger after the inauguration of the day.
Tax increases and a significantly improving economy leading to higher interest rates are concerns that could become the driving force for markets later this year.
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“Post-inauguration correction likely on top politics, profits and positioning,” wrote Michael Harnett, chief investment officer of Bank of America.
The S&P 500 grew at an annualized rate of 13.73%, or 67.26%, over Trump’s term, the index’s third-largest annualized profit under a president, as investors celebrated tax cuts and the return of regulations. The benchmark index, which set 150 records under Trump, reached 0.6% below its all-time high on Tuesday, the last full trading day of its term.
The Nasdaq Composite Index, meanwhile, has achieved an annual return of 24.17%, the largest under a president since the 1971 exchange during the Nixon administration. The technology index set 183 records during Trump’s four years in the White House.
“Markets are praised for perfection,” said Greg Valliere, chief financial officer of AGF Investments in Toronto, which has $ 38.8 billion in assets.
Biden has undertaken to increase the top tax rate to 28% from 21%. The tariff was lowered as part of Trump’s tax savings and jobs law, which also encouraged U.S. companies to bring home $ 1 billion in overseas cash.
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Other tax changes under consideration increase the highest tax rate on capital gains and dividends to 43%, compared to 24%, and also increase the income tax for the highest earners.
Aside from higher taxes, investors must grapple with the effects a red-hot U.S. economy will have on interest rates.
Economists at Goldman Sachs predict that US gross domestic product will grow at an annual rate of 5% and a rate of 5.8% for the year in the first quarter of 2021, bolstered by the recently approved $ 4.09 COVID-19 aid package 900 billion. The economy could grow at an even faster pace if Congress passes the $ 1.9 billion package that Biden proposed last week.
A model from the Federal Reserve Bank of Atlanta that takes into account recent economic data shows that the economy probably grew in the fourth quarter of last year at an annual rate of 7.4% after falling in the third quarter with a record rate of 33.4%. reopens after COVID-19 connections.
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The enthusiasm surrounding the economic recovery caused scarcity in the bond market, where the sale of US Treasury led to the 10-year yield rising from 0.515% on Tuesday, August 4, to X%. The protest took place despite the fact that the Federal Reserve has repeated its promise to keep interest rates close to zero until at least 2023.
Valliere said he would “not be shocked” if he saw the ten-year return reaches 1.5% by the summer and warns that the 2% return would be a “concern for the stock market”, which had a relentless bid fueled by the Fed’s promise to keep rates low and talk of additional fiscal stimulus from Congress.
The price-to-earnings ratio of the S&P 500 is currently trading at 27.4 compared to its historical average of 17.6, back to 2000, according to Dow Jones Market Data.
The options market points to even higher prices, says Anthony Saliba, CEO of the Chicago-based Matrix Execution Group, an executive broker that trades in options and stocks. “There is more demand for the calls than there is supply.“
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The preference of holding calls over sales indications indicates that investors prefer not to buy protection, which is usually done to guard against a downside.
Saliba, who has been competing against the market since the week after the election while trading in and out of the positions, admits that there is nothing to indicate a looming turnaround in the stock market, but he is still looking for ‘ a sharp move lower.
“I think you come through the inauguration, you see the fighting under the Democratic Party and then I think people say, ‘Maybe I’ll make better profit,'” Saliba said.