After a volatile second month due to rising fear of inflation, the market is seemingly calming down as high valuation stocks claw their way back up. The general assessment of the inflation situation now shared by the market and expressed by FED Chairman Jerome Powell is that the central bank has the tools to curb higher inflation, which is expected to be temporary.  Given the acceleration of vaccination and the speed of economy’s recovery, it’s not surprising that some financial institutions predict that the 10-year Treasury Yield will reach 1.75% to 2.00% by the end of 2021. Market participants may pass the stress test of inflation and rising bond yield if they are within reasonable range. However, we will wait and see how tax reform and changes of regulation will impact the financial market.

The Biden administration is expected to start a spate of tax increases, targeted at companies and the super-rich, to fund initiatives in infrastructure, research, and education, and to resolve increasing inequities. Negotiations involving various interested parties may result in the final package being a compromise. There will be some changes, but not as so dramatic as some people think. We will see a corporate tax hike, no matter it’s 25% or 28%. This may reduce corporate earnings in 2022. The minimum tax levied on overseas profit, which is complicated and will likely depend on other countries’ cooperation, will have little material impact.  The Democratic Party’s intended changes on personal tax will give rise to many debates. It’s relatively easy to raise the income tax rate for the rich and lower estate and gift tax threshold, in comparison to the efforts required to eliminate step-up basis in inherited assets.

Some market volatilities due to tax changes are expected. We need to evaluate the full impact of tax changes and decide if the tradeoff will be beneficial in the long run. The chances of tax changes being detrimental to the economy’s fundamentals are slim, but it’s likely that some problems in our current society will have to be tackled.

Around the world regulation is an attention-catching topic, esp. for high techs. For now, regulating high-techs isn’t on the Biden administration’s radar. However, their Chinese counterparts, such as Alibaba and Tencent, are undergoing a wave of regulation and control, their stock prices experiencing continual hammering. Bill Hwang’s recent drama is partly related to the selling pressure of Chinese tech stocks.

All in all, we’ll likely be seeing some market volatilities due to tax reform and regulation in the coming quarters of the year. Stay tuned!


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