HSBC profit jumps as vaccine rollout spurs recovery hopes
By Lawrence White 10 hrs ago

© Reuters/Carlo Allegri FILE PHOTO: An HSBC bank logo is pictured in New York

LONDON (Reuters) -HSBC Holdings PLC beat quarterly profit forecasts and released $400 million it had set aside to cover bad loans caused by the pandemic, as rapid vaccine rollouts in the United States and Britain raise hopes for an economic recovery.

Europe's biggest bank by assets cautioned, however, that high levels of uncertainty meant it was keeping the bulk of the $3 billion it set aside a year ago to cover potential bad debts.

"We are still being relatively cautious, and we've retained about 70% of the reserve build up we did last year," Chief Financial Officer Ewen Stevenson told Reuters.

HSBC reported on Tuesday profit before tax of $5.78 billion for the three months to March 30, up from $3.21 billion a year ago and well above analysts' average forecast of $3.35 billion as compiled by the bank.

However, this compared with $6.21 billion in the same period in 2019, showing the lender has some way to go to get back to pre-pandemic profit levels.

HSBC, which makes the bulk of its profits in Asia, said its credit losses for 2021 were likely to be below the medium-term range of 30-40 basis points it forecast in February.

Despite a plan to shift more business to Asia, Chief Executive Noel Quinn said the lender had no immediate plans to move its headquarters from Britain to the region.

London is still "a good place for the head office of an international bank," Quinn told reporters.

HSBC shares rose 1.7 % in London, the best performers in the benchmark FTSE index and reflecting earlier gains in its Hong Kong-listed shares.

"We are more optimistic than we were back in February, we expect GDP to rebound in every economy in which we operate this year," Quinn told Reuters, citing the successful rollout of vaccines in the United States and Britain as a key factor.

RATES SQUEEZE

HSBC's improved outlook and profits paled in comparison to U.S. rival JPMorgan, which earlier this month reported a 400% increase in quarterly profit and released more than $5 billion in bad loan provisions.

That partly reflected the European lender's heavy reliance on global interest rates to make money, which it said in February it would try to address by shifting to more fee-based business, such as wealth management.

Hibor, the benchmark lending rate in HSBC's most profitable market of Hong Kong, was near 10-year lows for much of the quarter, and the lender's revenue overall fell 5% as such low rates compressed income from lending.

"HSBC is not alone in feeling the squeeze of net interest margins, which tightened again slightly over the quarter, but other banks with huge investment banking arms have been able to capitalise on the trading surge over the past year," said Susannah Streeter, analyst at online investment platform Hargreaves Lansdown.

While HSBC lagged U.S. peers in its performance, it at least avoided losses from the collapse of U.S. investment fund Archegos that blighted European rival UBS's results.

HSBC had no direct or indirect exposure to Archegos, Quinn told reporters.

HSBC also said it was continuing negotiations for the sale of its French retail banking business, but no final decision had been taken. Reuters reported last month that HSBC had entered negotiations to sell the business, which has 270 branches, to private equity firm Cerberus.

The lender likewise had no update on progress to dispose of its similarly underperforming U.S. retail banking business.

(Reporting by Lawrence White. Editing by Emelia Sithole-Matarise and Mark Potter)

Credit Suisse investors exposed to collapsed Greensill Capital fund are facing another $190 million of losses

egraffeo@businessinsider.com (Emily Graffeo)

© Arnd Wiegmann/Reuters The logo of Swiss bank Credit Suisse is seen at a branch office in Bern, Switzerland October 28, 2020. Picture taken October 28, 2020. Arnd Wiegmann/Reuters

Credit Suisse investors exposed to the collapsed Greensill Capital fund may face an additional $190 million loss on their holdings.

Greensill filed for insolvency in March when it couldn't roll over insurance coverage for products in sourced and packaged.

Credit Suisse investors who were exposed to funds invested in assets sourced by collapsed financial firm Greensill Capital may face an additional $190 million loss on their holdings, according to Bloomberg.

A discount of roughly 7% will be applied to notes on a book of around $2.8 billion loans held in the funds, which will add to losses stemming from troubled borrowers including Katerra, BlueStone Resources, and GFG Alliance, reported Bloomberg, citing a Credit Suisse statement.

Greensill Capital filed for insolvency on March 8 as it couldn't roll over insurance coverage for some of the products it sourced and packaged and couldn't repay a $140 million loan to Credit Suisse. The firm specialized in supply-chain finance, a type of short-term cash advance to companies to stretch out the time they have to pay their bills.

Credit Suisse added that the valuation on the $2.3 billion notes linked to Katerra, Bluestone and GFG remain uncertain. Credit Suisse did not identify creditors that may not fully repay the loans.
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UBS, Nomura push global banks' Archegos losses over $10 billion

By Brenna Hughes Neghaiwi 
REUTERS

4/27/2021

© Reuters/Arnd Wiegmann 

 Logo of Swiss bank UBS is seen in Zurich

ZURICH (Reuters) -UBS reported an unexpected $774 million loss on Tuesday from the collapse of U.S. investment fund Archegos, taking the total hit to global banks from the stricken family office beyond $10 billion.

The charge taken by Switzerland's biggest bank comes as the fallout from Archegos continues to ripple across the banking industry, with Nomura posting on Tuesday its biggest quarterly loss in over a decade as a result of its dealings with the stricken fund. The Japanese bank said it will book losses of around $2.9 billion this year on Archegos.

Morgan Stanley lost nearly $1 billion on the family office's implosion while UBS' cross-town rival Credit Suisse has been hit the hardest with a more than $5 billion charge after Archegos defaulted on margin calls in late March, triggering a fire sale of stocks.

UBS, the world's biggest wealth manager, said it was now reviewing all of its client relationships both within its prime brokerage unit, which caters to hedge funds, and within its family office business, which manages very large pools of money for wealthy individuals and families. It is also reviewing its risk management systems.

"I understand you're disappointed. We are disappointed as well," UBS Chief Executive Ralph Hamers told analysts on a call fielding queries over the loss, the extent of which had surprised investors.

UBS shares fell 3.0% in morning trade.

"(The Archegos loss) highlights the inherent risk in its capital markets activities and presents a setback against its (UBS's) otherwise risk-averse culture," Moody's analyst Michael Rohr said in a note. "The bank's strong capital and liquidity remain key credit strengths safeguarding its financial profile and ratings."

UBS, which had previously declined to comment on any fallout from Archegos, said on Tuesday the revenue hit to its prime brokerage business had reduced net profit by $434 million in the first quarter.

Still, net profit of $1.82 billion for the first three months of 2021 beat the $1.59 billion median forecast from 20 analysts polled by the bank amid a bumper quarter for debt and stock deals.

Hamers, who took over from long-time boss Sergio Ermotti in November, was hired to help boost the bank's digitalisation efforts after a successful stint doing so at ING.

But his start at UBS, widely lauded as an opportunity to prime the bank for a more tech-centred future, has been complicated by a Dutch criminal investigation into his role in money laundering failings at ING.

Hamers announced several strategic initiatives when he spoke to analysts on Tuesday, centered around making UBS a faster and more client-driven "digital native" firm focused on sustainable investing.

A simplification of its setup and new digitalisation efforts should help generate approximately $1 billion in gross savings per year by 2023, the bank said.

UBS has taken a back seat in financial headlines over recent months, after a slew of painful missteps at its nearest rival Credit Suisse prompted losses, sackings and probes at Switzerland's No. 2 bank.

Hamers on Tuesday said the bank did not feel the need to disclose the loss on Archegos earlier due to the strong Q1 results, and had no plans to ditch its prime brokerage business following the debacle.

It had exited all remaining positions in April, leading to a further $87 million trading loss in the second quarter, Hamers said.

Taking a cautious approach towards the second quarter, the bank said it expected client activity levels to come down from the highs seen in the first three months of the year, partially offset by a boost in recurring fees it generates off managing client investments due to higher asset prices.

RECORD CLIENT ACTIVITY

UBS derives the biggest chunk of its profits from advising and managing money for the world's rich, while also maintaining smaller global investment banking and asset management operations.

It conducts retail and corporate banking only in its home market.

That business model paid off in 2020, as its low-risk lending book - comprised primarily of mortgages and loans to the wealthy, as well as a smaller portion of corporate and retail credits in its prosperous Swiss home market - suffered fewer losses than many high street peers.

Now, in the first three months of 2021, the bank once again overshot financial targets on the back of record activity across its client franchises.

U.S. banks posted forecast-beating results for the first quarter, with Goldman Sachs boosting profits six-fold and Morgan Stanley raising profits 150% despite disclosing a nearly $1 billion loss on Archegos.

UBS, however, saw investment banking pre-tax profit fall 42% on the back of the charge related to Archegos and more modest revenue growth in the rest of its trading business.

Wealth management saw profits rise 16% as lending growth and high transaction levels helped cushion the impact from falling and persistently low interest rates.

(Reporting by Brenna Hughes Neghaiwi; additional reporting by John Revill; Editing by Michael Shields, Muralikumar Anantharaman and Carmel Crimmins)

J&J execs get pay raises, but only after bruising shareholder 'Vote No' campaign

By Jessica DiNapoli and Ross Kerber 

CNBC 4/26/2021

© Reuters/Mike Blake FILE PHOTO: A Johnson & Johnson building is shown in Irvine, California

NEW YORK/BOSTON (Reuters) -Roughly 57% of investor votes cast backed healthcare company Johnson & Johnson's executive pay for 2020, a low level of support for a proposal most shareholders usually rubberstamp.

The low support, not including abstentions, for the non-binding proposal comes after the Office of the Illinois State Treasurer urged other shareholders to vote "No" on the company's pay practices, namely because J&J sets aside certain litigation costs when calculating executive compensation, including from the U.S. opioid epidemic.

J&J did not immediately respond to a request for comment on Monday.

Proxy advisors Glass Lewis and Institutional Shareholder Services Inc also recommended against J&J's pay. Johnson & Johnson had said it has always excluded certain one-time costs in its compensation for top brass.

"This vote demonstrates the significant disapproval among Johnson & Johnson shareholders," said Illinois State Treasurer Michael Frerichs in a prepared statement. "This vote sends a strong message to the company that executives should be accountable for all consequences of corporate conduct."

Other companies facing low say-on-pay support have said they would change their executive compensation structures in the future.

Drug distributor Cardinal Health Inc has said it will engage with shareholders to incorporate their views in its executive compensation plan after a minority of them revolted in November against a executive pay structure similar to J&J's.

Walt Disney Co in 2018 adjusted the compensation of then-CEO Bob Iger after 52% of shareholders rejected his pay, Reuters has reported.

(Reporting by Jessica DiNapoli in New York and Ross Kerber in Boston; Editing by Karishma Singh)

CRIMINAL CAPITALI$M

SolaFide Esports owner banned from competitive League for 3 years after not paying players

Michael Kelly 
4/26/20-21

© Provided by Dot Esports

SolaFide Esports owner Colin “Oddity” Ethan has been banned from all Riot-sponsored esports events after failing to pay the members of his League of Legends team, Riot announced today.

The ban, which serves as a retroactive three-year restriction, will last until Jan. 1, 2024. Until that point in time, Oddity will be unable to participate in any and all Riot-sanctioned esports leagues.

“SolaFide Esports had not paid the agreed upon wages of its players, coaches, and management staff,” Riot said. “Furthermore, Oddity did not fulfill his obligations and commitments to Team Members regarding payment and withheld prize money from SolaFide players and coaches. The LCS views this as conduct beyond the confines of the best interests of Proving Grounds and other Riot-sanctioned leagues.”

As a result of Riot’s competitive ruling, SolaFide has ceased its operations in professional League, according to a tweet posted by Oddity. The SolaFide brand would have been able to continue competing in professional League if the organization was willing to make a transfer of ownership.

“With the strenuous complications caused by Covid-19 felt by many, here at SolaFide we have also been affected,” Oddity said in his own statement. “Unfortunately, this coupled with the inability to transfer funds internationally has caused us significant accounting issues which has made us unable to pay out our contracts in a timely fashion.”

SolaFide Esports featured several former LCS pros, including Dhokla, Tuesday, Apollo, and Zeyzal. The team’s players disbanded its roster on March 18 in opposition of the organization’s lack of sufficient payment.

Unsealed Soviet archives reveal cover-ups at Chernobyl plant before disaster

KYIV (Reuters) - The Soviet Union knew the Chernobyl nuclear plant was dangerous and covered up emergencies there before the 1986 disaster, the Ukrainian authorities said as they released documents to mark the 35th anniversary of the accident on Monday.

© Reuters/GLEB GARANICH FILE PHOTO: Children's beds

 are seen in a kindergarten near the Chernobyl Nuclear Power Plant

 in the abandoned city of Pripyat


After a botched safety test in the fourth reactor of the plant, located in what was then Soviet Ukraine, clouds of radioactive material from Chernobyl spread across much of Europe in what remains the world's worst nuclear disaster.

The archives show there was a radiation release at the plant in 1982 that was covered up using what a KGB report at the time called measures "to prevent panic and provocative rumours", Ukraine's security service (SBU) said in a statement on Monday.

There were separate "emergencies" at the plant in 1984, it added.

"In 1983, the Moscow leadership received information that the Chernobyl nuclear power plant was one of the most dangerous nuclear power plants in the USSR due to lack of safety equipment," the SBU said.

When a French journalist collected water and soil samples from the Chernobyl area after the accident in 1987, the KGB swapped the samples for fake ones in a special operation, the SBU cited another KGB report as saying.

Unsealed Soviet archives reveal cover-ups at Chernobyl plant before disaster

Thirty-one plant workers and firemen died in the immediate aftermath of the 1986 disaster, mostly from acute radiation sickness.

Thousands more later succumbed to radiation-related illnesses such as cancer, although the total death toll and long-term health effects remain a subject of intense debate.

The present day government in Kyiv has highlighted the Soviet authorities' bungled handling of the accident and attempts to cover up the disaster in the aftermath. The order to evacuate the area came only 36 hours after the accident.

"The 35th anniversary of the Chernobyl tragedy is a reminder of how state-sponsored disinformation, as propagated by the totalitarian Soviet regime, led to the greatest man-made disaster in human history," the foreign ministry said.

(Reporting by Matthias Williams, editing by Estelle Shirbon)

Montreal dockworkers strike as federal government mulls back-to-work legislation

Video: Ottawa intervenes to avert Port of Montreal strike (Global News)

MONTREAL — Operations at the Port of Montreal came to a halt after more than 1,000 dockworkers began a strike Monday morning, causing a complete shutdown at the facility.

© Provided by The Canadian Press

Lisa Djevahirdjian, a spokesperson for the Canadian Union of Public Employees (CUPE), said negotiations are ongoing, but workers are disappointed to hear that Ottawa is considering back-to-work legislation.

“Obviously, workers are not happy because they want to negotiate, the point is to negotiate a deal,” Djevahirdjian said.

“The point the union wants to make is this strike was avoidable,” she said, adding the strike eventually took place because of pressure tactics from the employer.

Workers at the port have been without a contract since December 2018, and started to refuse overtime and weekend work earlier this month. The union previously enacted a 10-day strike in August.

On Sunday, federal Labour Minister Filomena Tassi said Ottawa has filed notice that it will table back-to-work legislation if the stoppage isn't resolved in the coming days.

She said the government doesn't want to intervene but may have no choice but to prevent potentially long-lasting harm to the economy if the strike continues.

"The Port of Montreal is critical to the economic well-being of Canadians across the country, particularly those in Quebec and Eastern Canada," said Tassi in a statement on Twitter.

"The government must act when all other efforts have been exhausted and a work stoppage is causing significant economic harm to Canadians."

Conservative Leader Erin O'Toole didn't close the door to supporting legislation to resolve the impasse.

"We're going to talk with unions, companies and exporters because it's important to have a solution," he said. "There is a serious risk to our economy with a strike of several days. We must find a solution and examine the bill.”

Meanwhile, New Democratic Party deputy leader Alexandre Boulerice said it was the employer and the union that needed to find a solution at the bargaining table.

“By interfering in the negotiation process, the Liberals are destabilizing the balance of power between workers and their employer for good,” said Boulerice. “The employer's position is strengthened and they will no longer have any incentive to settle the labour dispute.”

The Port of Montreal saw a dip in activity as early as last month, as customers sought other ports to export and import from ahead of the strike.

Several employers groups have raised concerns about the impact of the strike on business.

Canadian National Railway said customers began to divert freight several weeks in anticipation of a second strike in about six months that previously caught shippers and importers by surprise.

Railway CEO Jean-Jacques Ruest said it received additional business from the last strike but also unplanned costs and disruption to its own operations.

The impact this time shouldn't be substantial, he said, noting that Ottawa is considering legislation to end the strike or prompt a resumption of negotiations.

"All in, it's not a big to-do in terms of our second-quarter results," he told analysts during a conference call about first-quarter results.

The Canadian Chamber of Commerce welcomed the government’s plan to table back-to-work legislation.

“The prospect of a second strike in seven months has disrupted supply chains in all industries and hampered Canada’s economic recovery at a time of severe downturn,” said Perrin Beatty, the chamber's chief executive.

“We call upon all members of Parliament to pass the bill expeditiously to prevent the serious damage a strike would have on jobs and on Canada’s economic recovery.”

This report by The Canadian Press was first published April 26, 2021.

The Canadian Press

Biden's 100-day stock market performance is the hottest going back to the 1950s

Jeff Cox 

CNBC

4/26/2021

President Joe Biden has witnessed an unprecedented growth on Wall Street in his first 100 days in office, better than any of his predecessors going to at least Dwight Eisenhower.

Massive stimulus and a booming economy, both of which were underway well before he took office, have helped propel the market.

If anything, the market's main worry may be that it's moving too fast and a policy mistake could slow it down.

© Provided by CNBC U.S. President Joe Biden speaks during an event with the CEOs of Johnson & Johnson and Merck at the South Court Auditorium of the Eisenhower Executive Office Building March 10, 2021 in Washington, DC.

So far in his young presidency, President Joe Biden has been one of the best friends the stock market has ever had.

Better, in fact, than any president before him going back to at least the 1950s and the Dwight Eisenhower administration, as the 46th chief executive has witnessed an unprecedented growth on Wall Street in his first 100 days in office as measured from the time of his election.© Provided by CNBC

How long that cozy relationship will last is about to be determined, as investors have to digest a slew of potential obstacles from tax policy, regulations associated with Biden's ambitious climate agenda, and the threat of overheating in an economy already on fire.

But so far, investors have shown no hesitance in making huge bets on corporate America.

"Biden's first 100 days have already delivered the strongest post-election equity returns in at least 75 years, due to record fiscal stimulus and despite heavy use of Executive Orders," JPMorgan Chase strategist John Normand said in a note. The results are "not bad for some [former President Donald] Trump labeled as Sleepy Joe during the campaign."

Indeed, Biden's results have been staggering so far.

The S&P 500 has risen 24.1% since Election Day with numbers that easily trounce any of his predecessors.

The only administration going back to 1953, or the beginning of Eisenhower's term, to rival Biden's were those of John F. Kennedy, who saw an 18.5% rise during the same period.

Even Trump, who often touted how well stocks were doing, saw just an 11.4% rise for the first 100 days.© Provided by CNBC

To be sure, judging results that early in a presidency is tricky. In Biden's case, it's especially difficult to gauge whether the market was reacting to him specifically or simply continuing to ride the steam locomotive that began in late March 2020 and has shown only sporadic signs of slowing down since.

"Anyone that became president this year was going to have a pretty significant tailwind," said Art Hogan, chief market strategist at National Securities. "You're coming into a point where you had to just not mess things up, and hopefully improve on what it was you needed to get done."

No president, in fact, had a tailwind comparable to what Biden was handed in January.

Congress already had appropriated more than $3 trillion in stimulus and the Federal Reserve had relaxed policy to the loosest point in the central bank's history. All told, more than $5.3 trillion has been spent on Covid-related relief efforts, and the Fed's bond purchases have nearly doubled its balance sheet to just shy of $8 trillion.

With possibly trillions more coming in spending on infrastructure, a term that congressional Democrats have paint with a generously broad brush, that gives forward-looking investors even more reason to plow money into the market.

On top of that, the U.S. is still vaccinating about 3 million people a day, adding hopes that growth will continue as more of the economy comes back to life ahead.

"It will be intriguing to see what the next 100 days looks like," Hogan said. "There's a significant tailwind for reopening. The tug-of-war between the virus and vaccine is finally being won by the vaccine."
What could go wrong

Still, there's plenty to watch ahead as the sizzling bull market tries to rage on.

After all, the S&P 500 is up about 48% from a year ago, and it hasn't had a meaningful pullback in more than six months. From November through March, investors poured more money into equity-based funds than they did in the previous 12 years, according to Bank of America.

Moreover, some 96% of the components in the all-encompassing Wilshire 5000 have seen positive returns in the past 12 months, which Hogan said is a record and has come despite more volatility than usual, particularly in the past few months.

© Provided by CNBC

"For sure, I would get concerned about going too far, too fast," Hogan said. "But the corrections seem like they're happening on a rotational basis instead of an index basis. At some point in time, there will be something that gums this up."

Markets have continued to push higher even knowing that Biden has pinned a bull's eye on the nation's richest earners as well as corporations, with both groups expected to see substantially higher tax bills ahead.

Concern remains, though, over policy mistakes in other areas.

All that stimulus has resulted in a $1.7 trillion budget deficit through just the first half of fiscal 2021, raising concerns over how all that red ink will be financed.

At the same time, the Fed has said it will not start tightening until it seems inflation that runs above its traditional 2% target for a considerable period of time as it takes aim at a goal of both full and inclusive employment.

Mohamed El-Erian, chief economic advisor at Allianz, said that "outcomes-based" approach to monetary policymaking is a mistake, particularly with inflation clearly on the rise. El-Erian told CNBC that "massive liquidity and a significant pickup in the economy recovery" are propelling the markets and should continue to do so unless there's "either a policy mistake or some sort of market dislocation."

One area he is watching is the Fed, which meets this week.

The policymaking Federal Open Market Committee is almost certain not to change policy or even indicate that interest rate hikes or a slowdown in asset purchases are anywhere on the horizon. El-Erian said he'd like to see a gradual tightening that starts soon.

"The risk of falling behind is high. Then you have to slam on the brakes," he said on "Squawk Box." "That's the one thing that can really disrupt the markets, if we get them slamming the brakes. So I would rather see them slowly tap the brakes now than have a very high risk of them slamming the brakes down the road."

While Fed officials have characterized the higher inflation numbers recently as temporary, El-Erian said supply-driven inflation, like with semiconductors and a number of consumer goods, indicates that may not be the case.

"I'm really worried that what they hope is transitory inflation is going to end up being persistent inflation," he said. "If we end up in a persistent inflation world, they're going to have to slam on the brakes, and the market reaction then will be much worse than it would be if they just tapered a little bit now."

Biden plans to beef up IRS to claim up to $700bn in tax from richest Americans
Edward Helmore in New York 
THE GUARDIAN 4/27/2021

Joe Biden plans to give tax collectors an extra $80bn to seek as much as $700bn in new revenue from high earners and large corporations, as part of the “American Families Plan” set to be unveiled this week.

© Provided by The Guardian Photograph: Evan Vucci/AP

Separately, the White House announced overnight that Biden will issue an executive order requiring federal contractors to pay a $15 minimum wage to workers on federal contracts.

Enhanced tax enforcement by the Internal Revenue Service (IRS), coupled with new disclosure rules, could raise $700bn over the next decade from wealthy people and privately-owned businesses, according to unidentified administration officials speaking to the New York Times.

The additional funding represents an increase of two-thirds over the agency’s entire funding levels for the past decade.

In a statement, the administration said the new federal wage floor “will promote economy and efficiency in federal contracting, providing value for taxpayers by enhancing worker productivity and generating higher-quality work by boosting workers’ health, morale, and effort”.

“The executive order ensures that hundreds of thousands of workers no longer have to work full time and still live in poverty. It will improve the economic security of families and make progress toward reversing decades of income inequality,” it said.

The measures come ahead of a major policy speech before a joint session of congress on Wednesday in which Biden is expected to frame raising taxes on wealthy Americans employing sophisticated schemes to lower tax exposure and closing corporate loopholes as a way of leveling the tax burden between middle and lower earning Americans and the wealthy.

As part of the new tax structure, the administration plans to raise the top income tax rate to 39.6% from 37% and raising capital gains tax rates on those who earn more than $1m a year. Tax rates will also be raised on income for people earning more than $1m per year through stock dividends.

Earlier this month, IRS commissioner Charles Rettig told a Senate committee that tax cheats cost the government as much as $1tn a year and the agency lacked the resources to enforce the tax code. Biden, it is widely reported, plans to use additional money raised by a crackdown to help pay for his “American Families Plan.”

But higher taxes face a pushback from Silicon Valley and Wall Street. Administration sources told the Financial Times that capital gains tax rise will hit only the richest 0.3% – a “sliver” of the US population.

Conversely, the White House has said that raising the minimum wage for hundreds of thousands of workers on federal contracts is “critical” to the functioning of the federal government “for cleaning professionals and maintenance workers who ensure federal employees have safe and clean places to work, to nursing assistants who care for the nation’s veterans, to cafeteria and other food service workers who ensure military members have healthy and nutritious food to eat, to laborers who build and repair federal infrastructure”.

Any decline in the stock market because of higher capital gains taxes will likely be short-lived, according to Goldman Sachs

mfox@businessinsider.com (Matthew Fox) 

4/26/2021

 Xinhua/Wang Ying/Getty Images Xinhua/Wang Ying/Getty Images

President Biden's proposed capital gains tax hike could weaken the stock market in the short-term, according to Goldman Sachs.

However, in the long-term, stocks have trended higher six months after previous capital gains tax hikes, Goldman said.

"We estimate $1+ trillion in unrealized capital gains for the wealthiest US households, but also large cash balances that should support equity demand," Goldman said.

A proposed capital gains tax hike by President Joe Biden is nothing the stock market can't handle, according to a Friday note from Goldman Sachs' David Kostin.

Stocks initially sold off 1% last Thursday after news broke that Biden will propose nearly doubling the capital gains tax rate to 39.6% for those making more than $1 million annually, but those losses were recovered on Friday.

That's the type of market action investors should expect if the tax proposal does pass: an initial sell-off followed by a longer-lasting rally.

Kostin's analysis of previous capital gains tax hikes found that S&P 500 declines tend to materialize prior to the capital gains tax hike as those impacted lock in their gains at a lower rate, but those declines are short-lived.

"The trend of net equity selling and falling stock prices around capital gains rate changes has usually been short-lived and reversed during subsequent quarters," Kostin said.

Goldman estimates that the wealthiest households own $1 trillion to $1.5 trillion in unrealized equity capital gains, or about 3% of the total US equity market cap.

But when the capital gains tax increased in 2013, "although the wealthiest households sold 1% of their assets prior to the rate hike, they bought 4% of starting equity assets in the quarter after the change and therefore only temporarily reduced their equity exposures in order to realize gains as the lower rate," Kostin explained.

And stocks can still go higher with US households sitting on a meaningful pile of cash, with net equity buying by households totaling $350 billion in 2021. That buying will be driven by the wealthiest 1%, according to Goldman, continuing a decades long trend.

According to Goldman, the top 1%, which accounts for 53% of household equity ownership, has bought $2 trillion of shares over the past 30 years compared to $800 billion in net selling by the bottom 99%

.

© Goldman Sachs Goldman Sachs

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