by Gary Alexander

April 11, 2023

As April 15 approaches this weekend, rest assured that your tax-filing deadline has been postponed, not just one day, not just two days to Monday, which turns out to be Emancipation Day in Washington DC, where federal workers have more days off than anyone in America, but to Tuesday, April 18 this year.

April 18 happens to be Patriot’s Day in Boston, the evening when Paul Revere made his midnight ride, replicated these days in the Boston Marathon, when feather-weight East Africans won 19 of the last 20 races, running 26 miles in the opposite direction – toward Boston – with this year’s race held on April 17.

Americans fought for freedom from lower British taxes than we face today, but tomorrow’s date, ironically, marks a little-observed tax victory. On April 12, 1770, the British Parliament actually listened to our faraway tax protest by repealing most of the dreaded Townshend Acts, the bills passed in 1767 and named after their sponsor, Charles Townshend. These acts levied a controversial set of tariffs, including duties on paint, paper, and tea. Colonial outrage prompted the British to roll back all of those hated acts and revenue duties, except that pesky one, the tea tax, which led to a certain Tea Party in Boston later on.

But don’t get complacent. President Biden is no Charles Townshend. Our fearless leader, who looked us in the eye and said he would never raise taxes on anyone earning less than $400,000, has proposed a gigantic tax increase that will hit those earning well under $400,000 as well as almost everyone else.

Within the President’s massive 2024 budget are tax increases that the Tax Foundation computes would leave the USA with the highest income tax burden of any of the 38 Western OECD countries:

Biden's Budget Would Raise Income Tax Rates Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The top capital gains tax rate (near 50%) is particularly chilling, as well as the near two-thirds (66%) total rate on corporate income. Investors and corporations might as well throw in the towel if this bill passes.

The good news is this bill won’t pass. President Biden’s budget (and this tax rip-off) are dead on arrival on Capitol Hill, thanks to last November’s narrow Republican majority in the House, but something like this level of highway robbery will be on the table in conference rooms between now and the end of 2023.

Also, don’t forget that inflation is pushing many Americans into higher tax brackets. Inflation is the quiet tax increase on the middle class and poor. The recent Inflation Reduction Act “may go down as one of the greatest confidence tricks on taxpayers in history,” said The Wall Street Journal in an editorial on March 25, 2023. It was promised to cost $391 billion in the decade from 2022 to 2031, but now, the Journal says, “A Goldman Sachs report projects its myriad green subsidies will cost $1.2 trillion – more than three times what the law’s supporters claimed.”  Furthermore, Jason Furman of Harvard University and the left-of-center Brookings Institution (Furman was also head of the National Economic Council in the Obama Administration) said the green energy subsidies of this “Inflation Reduction Act,” went mainly to the rich.

Reduction in Average Taxes Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Another Headline That May Go Down in History

In one of the world’s worst market predictions, the New York Times editorialized 130 years ago last week, on April 5, 1893, that, “It is too soon to say that a bull market is upon us, but the figures show that the tendency is toward higher prices.” In that same month, however, many of the smaller Wall Street houses defaulted, and the worst market slide in decades began by the end of April. The worldwide Panic of 1893 began in April of 1893, when foreigners (mostly British) began to withdraw their capital from U.S. banks.

Last Friday’s Top-of-Page-1 headline may not go down in history as that big of a blunder, but I wonder about its placement. It screams atop Page 1, “Stocks Haven’t Looked This Ugly in Years.” By a certain measure “relative to bonds,” stocks are at their “lowest level in years.” Normally, this is the kind of arcane statistical study that belongs in the Business & Finance section, not on the news slot. (The main news story was pretty flimsy, too: “U.S. Proposal Forbids Outright School Bans on Trans Athletes.”)

The Wall Street Journal Front Page Image

You wouldn’t know that there was a war in Ukraine, saber-rattling in China over Taiwan, nuclear bombs coming in Iran, a 40-year-high inflation and interest rates, Israel conducting strikes on two nations, the threat of artificial intelligence snooping into your computer searches, the IRS adding thousands more enforcement agents (see first article), trillion-dollar deficits, and a looming debt ceiling debate coming.

This article, by Eric Wallerstein, says “The equity risk premium – the gap between the S&P 500’s earnings yield and that of the 10-year Treasurys – sits around 1.59 percentage points, a low not seen since October 2007. That is well below the average gap of around 3.5 points since 2008. The reduction is a challenge for stocks going forward. Equities need to promise a higher reward than bonds over the longer term.”

True enough, on all points, but stocks are in an “earnings trough” after a very long period of exceptional earnings, and bond yields are rising again, after a 40-year decline. This is rare, but “this too shall pass.”

We’ll know more as first-quarter earnings come in, starting this week, but our favorite market economist, Ed Yardeni, reports that as of the week ending March 31, industry analysts projected S&P 500 earnings per share of $220.45 this year and $247.57 next year, which means a slight gain of 0.3% this year and a healthier rise of 12.0% next year, but bear in mind that results actually beat estimates 74% of the time.

Percentage of Companies Beating Earnings Estimates Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Also bear in mind that this is the third year of the Presidential cycle – a very strong year, historically, as I have pointed out in several past columns here. Year #3 is twice as good as any other year, historically.

Market Performance During Year Three of the Presidential Cycle Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Normally, I wouldn’t quibble with such an article if it were placed in Section 2 of the Journal, midway down the page, with a docile headline, like “Stock/bond ratio at 15-year low, favoring bonds,” but using the two words “STOCKS…UGLY” atop page 1 seemed to send a message to investors – Avoid Stocks!

But I like that – it’s a perfect contrarian Refrigerator Magnet “Gotcha” button for future reference, so let’s cut and paste this headline now, in April, then look at it a year from now and see how “ugly” stocks look.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
President Biden’s Saudi Insults Have Come Home to Roost

Income Mail by Bryan Perry
Earnings Season is the Next Big Hurdle for Equities

Growth Mail by Gary Alexander
A Tax Time Bomb is Ticking

Global Mail by Ivan Martchev
The Odds of a May Rate Hike Just Rose

Sector Spotlight by Jason Bodner
Investing Isn’t as Easy as Child’s Play…But It’s Close

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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