Thursday was shaping up quite nicely, as small-caps shrugged off some early weakness, and the S&P 500 was hitting an intraday high around mid-day, but news of a tax proposal by President Joe Biden hit the market like a sucker punch.
The proposal nearly doubled the long-term capital gains taxes for some wealthy taxpayers, but the market is concerned that these taxes would trigger a rush to lock in gains before the higher rates went into effect.
There are some substantial hurdles to passing a tax bill as proposed, but any move to increase taxes is deemed unfriendly to the market and business. It is likely that Republicans will push back hard, and passing anything will not be easy, but it is an obstacle that we will now have to navigate as the debate unfolds.
The Russell 2000 exchange-traded fund (IWM) did manage some relative strength, and breadth wasn't nearly as bad as the inverse of yesterday. There were 3,300 gainers to 4,500 decliners, which isn't bad at all, but both the Dow Jones industrial average and the S&P 500 gave back nearly all their gains from Wednesday.
This rotation back into some of the small caps is a good sign, but it is too bad that the strong momentum was undercut with the tax policy news.
We'll see how this news is digested overnight. The lows from Thursday are still the key level, and now the senior indices look more vulnerable than the small caps.
We still have plenty of earnings on the way that should provide some action, but sentiment was hurt today, and we need to fix that in order to generate more momentum.
Have a good evening. I'll see you tomorrow.
