Since 1945, post-tax day equity returns strongest when "big tax hit" involved = strengthens case for near-term upside

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2022 is a “pie in the face” kind of year

If someone asked me to describe 2022 so far, it is a “pie in the face” year. The world is facing several key turning points (inflation, supply chains, monetary policy, war) and these combined effects are impacting equities, bonds and commodities in a way not seen in the past 30 years. While our base case for 1H2022 was “treacherous,” the realized treachery is far greater.

  • but as painful as equities have been since the start of 2022
  • our base case is that 2/24/2022 is the “low” for 1H2022
  • and while stocks won’t go straight up, we think risk/reward still remains attractive 6M to 12M out
Bert And Ernie Pie In The Face GIF - Bert And Ernie Bert Ernie - Discover & Share GIFs
Source: Sesame Street

Capital gains taxes owed on 4/18/2022 estimated largest in history >$800 billion (for tax year 2021)

Equities have fallen in a straight line since late March (13 trading sessions) and the decline continued into April 18th. We have written about the impact from IRS taxpayer deadlines for this effect:

  • we highlighted stocks tend to do worse into tax day when prior year (tax year) gains strong
  • this is due to cash raised to pay for taxes
  • we highlighted that we estimate 2021 capital gains taxes owed likely >$800 billion, a record
  • and another $150 billion or more for crypto capital gains
Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside

This is our rough math for how we derived $800 billion in capital gains taxes owed.

Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside

Since 1945, post-tax day returns strongest when “big tax hit” involved = strengthens case for near-term upside

Our data science team, led by tireless Ken, compiled forward returns for equities post-tax day. And based on the tiers (deciles) of return, using the tax year gains — in this case, 2021 tax year gain was S&P 500 +29%.

  • post-tax day gains are particularly strong when tax year gains are highest two deciles
  • we looked at 3M forward return and top 3 deciles had highest win-ratio and 3M gain

  • intuitively, this makes sense
  • if investors need to raise cash to pay taxes, this drives indiscriminate selling to tax day (4/18/2022)
  • thus, the bounce subsequent to this reflects the alleviation of this selling pressure

Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside

Data by Wayne Whaley also shows next week post-tax day returns expected to be strong

This tweet by CMT Steve Deppe @SDJ10304 also highlights a similar effect. He is citing statistics by Wayne Whaley (WW Market Commentary Studies). This shows that:

  • for the week ending 4/18
  • when equities down for that week (4/11 to 4/18)
  • equities higher 14 of 17 times
  • median gain is +1.75%

So you get the picture. Stocks should be bouncing hard this week.

Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside
Source: https://twitter.com/sjd10304/status/1516195245737668612?s=12&t=s8YWp3owLu6Bsrblagxf4g

Federal Judge (FL) overturns TSA mask mandate for public transit = lifting mask mandates

On Monday evening, a Florida federal judge overturned the TSA mask mandate on public transit. The legal conclusion to the mandates is that U.S. District Judge Kathryn Kimball Mizelle for the Middle District of Florida deemed the policy “unlawful” and ruled the Centers for Disease Control and Prevention overstepped its legal authority by imposing the mandate in February 2021. The judge wrote the mask requirement “violates the procedures required for agency rulemaking,” according to Mizelle’s ruling from Tampa, Florida.

  • Airlines immediately relaxed rules on masks for customers, crew and workers
  • as of this writing, the Biden administration has not filed an objection
  • Epicenter stocks immediately responded with airlines +3% ( JETS 0.29% ) and cruise lines and hotels ( CRUZ -0.17% ) similarly rallying

This is a reminder that good news is still forthcoming regarding the US recovery. And that good news is good news for markets.

Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside
Source: https://nypost.com/2022/04/18/airports-and-airlines-drop-mask-mandates-after-court-ruling/

Ride sharing Uber and Lyft follow suit and relax restrictions

Ride sharing Uber ( UBER -1.43% ) and Lyft ( LYFT -0.67% ) quickly followed and relaxed mask mandates. This is all a positive, on balance, in our view. Customers of both airlines and ride-sharing can still choose to wear masks.

  • I realize there will be many leery of the lifting of mask mandates
  • but contrast this with the “zero case” policies being pursued
  • and I would choose this approach 100 of 100 times
Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside
Source: https://www.wsj.com/articles/uber-drops-mask-requirement-after-judge-voids-public-transportation-mandate-11650369863

STRATEGY: TINA + sentiment terrible + positioning low + tax selling = stocks should see some relief

There has been enormous damage to investor confidence and portfolios, given the continued steady drip of losses and pain wrested on markets in 2022. This is not the markets of the last two years. But this is the market environment we anticipated for 1H2022.

  • investors have become so skeptical
  • that our “treacherous 1H” + “2/24/2022 is the low” views
  • are now viewed as “extremely bullish”

  • indeed, on a relative basis
  • we are bullish, since everyone else seems bearish

But take a look at the returns of other asset classes below, as shared by Ben Carlson @awealthofcs:

  • Treasuries have been hammered –> down -29% YTD (long term)
  • corporate bonds -15%
Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside
Source: https://twitter.com/awealthofcs/status/1516451154225471496?s=12&t=wiA6-yGSl4HQ3eqGm0AHDg

Equities are the strongest weakling in 2022 –> and if rates rollover, Technology gets a “bid”

Get the picture? Stocks are actually the “strongest weakling” in 2022. So, despite equities feeling awful, down 6% YTD, other assets have done worse. This is going to be a headwind for 60/40 portfolios (bond/stock) and especially those that start to look at their first quarter 401K statements.

Weakling GIFs | Tenor

…Mark Newton, Head of Technical Strategy of Fundstrat, sees rates “capped” near-term

Another positive for equities is the possibility that interest rates are capped near-term. Mark Newton believes that 3% is a key level for the US 10-year.

  • he does not see 2018 highs to be exceeded (3.25%)
  • he believes peak in rates is possibly next 3-5 weeks

If Newton’s view is correct, this is supportive of Technology (see my comment below). And Technology is the largest sector in the S&P 500. If this is true, then equities indeed would hold above the 2/24/2022 lows.

Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside
Slack.com


STRATEGY: We lean “bullish” into 2Q2022, but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.

– this is in context to a challenging 1H2022
– so jagged next 3 months
– but > 88% probability that bottom for 2022 is in

Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities  BITO 3.26%   GBTC 3.22%   BITW -2.74%
– Energy
– FAANG  FNGS -0.16%   QQQ -0.21%

Combined, it can be shorted to BEEF.

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead  FB  AAPL -1.12%   AMZN 0.19%   NFLX -1.10%   GOOG 0.21%

All in all, one wants to be Overweight BEEF

Since 1945, post-tax day equity returns strongest when big tax hit involved = strengthens case for near-term upside

_____________________________

31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here

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POINT 1: Daily COVID-19 cases
This data will be updated every Friday.

POINT 2: Vaccination Progress
This data will be updated every Friday.

POINT 3: Tracking the seasonality of COVID-19

This data will be updated every Friday.

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