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WeekWatch -‘US stocks enjoyed a lift towards the end of last week’ April 2021

WeekWatch -‘US stocks enjoyed a lift towards the end of last week’ April 2021

US stocks enjoyed a lift towards the end of last week, having fallen the day before on news that President Biden’s government will target wealthy Americans with tax increases.

On Thursday last week, President Biden’s team leaked details of their proposed tax increases. Under the plans that emerged, the top marginal income tax rate is proposed to rise to 39.6% from 37%. What generated more headlines, though, was the proposal to also bring the federal tax rate for capital gains to 39.6% – almost double what it is at present. The higher rate of capital gains tax is set to affect people whose annual income is more than $1 million.

US stocks lowered on the news, with the three largest US stock indices falling by around 0.9%. Even though Biden’s desire to increase taxes was made clear in his campaign, it caused some jitters in markets as investors assessed what it meant for their own positions.

However, on Friday, US equities rallied on positive news about the country’s economic recovery. Data on jobs and activity gave the positive signals that the market seemed to be looking for, and the result was US stocks ending the week only slightly lower than they opened it. Weekly new unemployment claims were at their lowest level since the start of the pandemic, while manufacturing and services numbers also revealed stronger activity.

“We continue to believe that data on US growth and inflation have still got room to surprise to the upside, even given bullish consensus projections,” wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

Similarly, in the UK, the data suggest that the recent loosening of the national lockdown is already having a positive economic effect. On 12 April, the government allowed non-essential retailers and outdoor hospitality venues to resume trading. Since then, footfall in retail businesses has increased dramatically: in the week leading up to 12 April, it was 65% lower than it was two years ago, but last week it was just 25% lower, according to Capital Economics.

“The rises support our view that monthly GDP will go from being 7.8% below its February 2020 peak this February, to about 3% below by the time most sectors are fully open in July, and back to the February 2020 level before the end of the year,” wrote Paul Dales, Chief UK Economist at Capital Economics.

Last week also brought news about one type of vaccination. Since last year, the world has been busy focusing on those that deal with the most urgent illness, but last week a rare piece of good news emerged on another subject. The University of Oxford revealed that early trials of a new malaria vaccine show it is 77% effective against the disease. Malaria kills approximately 400,000 a year, most of whom are children in sub-Saharan Africa.

The news was less positive on the COVID-19 front. Although some countries are racing ahead with successful vaccination programmes, it’s still a mixed picture globally. Last week, India reported the world’s largest ever one-day jump in new daily COVID-19 infections; making the country of 1.3 billion the new frontline in the world’s struggle against the virus. Japan declared a state of emergency in Tokyo, Osaka, and two other major prefectures in response to rising case numbers. Similarly, Halifax, Nova Scotia began a new one-month lockdown.

Investors are keenly watching COVID-19 levels due to their potential to undermine the market recovery that has taken place since successful vaccine programmes were announced last year. The speed with which rising case numbers shut down regional economies should remind us to stay cautious, and to expect further ups and downs in markets as they respond to the good and bad news about COVID-19.

Life is beginning to resemble normality again in many countries around the world, but the interconnected nature of the world today means that bad news about COVID-19 affects markets everywhere, wrote Kristina Hooper, Chief Global Market Strategist at Invesco: “What happens in Vegas, stays in Vegas… But what happens in Sao Paolo, New Delhi, Paris, Amsterdam, or Los Angeles doesn’t stay there… So, we need to care about vaccinations everywhere.”

BlueBay and Invesco are fund managers for St. James’s Place.

 

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