Stock Market Today: Threat of Capital Gains Tax Hike Thumps Stocks

After three days of placid macroeconomic news, the markets swung on a pair of big announcements Thursday – good news on the labor front, but bad news for wealthy Americans paying capital gains taxes.

Earlier in the day, investors were encouraged by another drop in weekly unemployment filings. Initial jobless claims for the week ended April 17 dropped by 39,000 to a recovery-era low 547,000.

"Altogether, the sharp decline in the rate of job separation is consistent with an improvement in labor market conditions, likely on account of progress on vaccinations and an easing of social distancing restrictions in many states," say Barclays strategists Michael Gapen and Pooja Sriram.

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However, the market took a sharp turn lower in the afternoon after Bloomberg reported that President Joe Biden will propose roughly doubling the capital gains tax rate for Americans earning at least $1 million to 39.6%.

This proposal, which would result in federal tax rates of up to 43.4% for the wealthiest Americans after also factoring in the Net Investment Income Tax, has been floated as a possibility for some time, but Bloomberg's report was the most concrete indication yet that such a hike could be on the table.

The blue-chip indexes, which were on track to finish with modest gains to marginal losses, finished solidly lower. The Dow Jones Industrial Average declined 0.9% to 33,815, the S&P 500 lost 0.9% to 4,134 and the Nasdaq Composite fell by 0.9% to 13,818.

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Other action in the stock market today:

• The small-cap Russell 2000 wasn't dinged up as hard, slipping 0.3% to 2,232.
• U.S. crude oil futures clawed out a 0.1% gain to $61.43 per barrel.
• Gold futures declined 0.6% to $1,782.00 per ounce.
• The CBOE Volatility Index (VIX) rebounded 7.1% to close at 18.74.
• Bitcoin prices sank by 4.8% to $52,967. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)

Will a Capital Gains Tax Hike Weigh on Stocks for Long?

Not everyone agrees that the sky is falling. Some market watchers – such as Ben Carlson, director of institutional asset management at Ritholtz Asset Management, and Dave Nadig, CIO and Director of Research for ETFTrends and ETFdb – questioned, via tweet, how much impact capital gains taxes really have on stock market performance.

Others doubt such a tax can even pass Congress.

Gene Goldman, chief investment officer at Cetera Investment Management, cites three reasons he thinks Biden's pitch won't win in its current form: "1) This is a drastic tax change; 2) Republicans will not go along with it, and even some Democrats might not be on board, though they could be persuaded if the tax change includes a removal of the SALT tax cap; 3) Though the economic recovery is broadening, this could hurt this still-delicate recovery."

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