Analysis: Wall Street cheers U.S. election removing major tax-hike threat

In this news, we discuss the Analysis: Wall Street cheers U.S. election removing major tax-hike threat.

(Reuters) – Wall Street breathed a sigh of relief on Wednesday, as the latest U.S. election tally showed a divided government that made the prospect of tax hikes advocated by Democratic presidential candidate Joe Biden unlikely.

Biden has proposed raising the capital gains tax rate from 20% to 39.6% for those earning more than $ 1 million (£ 769,230), which would deal a blow to the management industry of assets. Other tax hikes he proposed included increasing the statutory corporate tax rate from 21% to 28%.

Biden led the major Midwestern states in the race for the White House as votes were counted Wednesday afternoon, but President Donald Trump’s Republican Party was on the verge of retaining control of the Senate even as the Democrats retained their majority in the House of Representatives. The tax changes would have to be passed by the House and Senate and approved by the White House to become law.

Even if Biden were to prevail over Trump, the makeup of the legislature would make it difficult for him to push forward his tax changes. Earlier predictions by pollsters that Democrats would gain control of the White House and Congress had cast a cloud over Wall Street, fund managers said.

“The markets take comfort in the fact that there likely won’t be a significant tax hike anytime soon,” said Troy Gayeski, co-chief investment officer of hedge fund investment firm SkyBridge Capital.

Shares of private equity firms, whose performance fees would have taken a fiscal blow if Biden had been successful, soared on early voting results. Shares of Blackstone Group Inc BX.N, KKR & Co Inc KKR.N and Carlyle Group Inc CG.O jumped 7.1%, 7.4% and 4.2% respectively. Other fund managers, including hedge funds and venture capitalists, also expressed relief.

“Regardless of the outcome for the president, fears of a blue wave and the potential for a radical overhaul of private equity regulations are likely due to the Republican Party’s continued control of the Senate,” analysts wrote. Jefferies in a note Wednesday.

Shares of large mutual fund managers such as BlackRock Inc BLK.N and T. Rowe Price Group Inc TROW.O, whose business has also reportedly been hit hard by a hike in capital gains tax, have also resumed.

“Even if Biden wins the presidency, it will be much more difficult for him to push through his tax increase proposals and the market clearly appreciates that,” said Bolvin Wealth Management group president Gina Bolvin. “Markets love deadlock because divided government eliminates extremes.”

Multimedia coverage of the US elections: here

IMPACT ON ACHIEVEMENT

An increase in capital gains tax would also have weighed on Wall Street’s mergers and acquisitions advisory activities. Investment bankers said the resumption of corporate divestitures by individuals, families and private equity firms ahead of the election was fueled by fears that Biden could implement his tax plan. Bankers feared trading activity would slow over the next several years if Biden’s tax changes were passed.

Even though taxes are only a consideration for business sellers, the prospect of divided government has now removed a significant overhang for negotiators, business advisers said.

“If you had a family that was looking to sell a business, they can breathe a sigh of relief now in the face of possible tax changes, but they should be aware that things could still change in two years,” said Daniel Wolf, partner in law. Kirkland & Ellis LLP.

Banks have been big beneficiaries of tax cuts under Trump, which makes a worrying reversal. Biden’s tax plan has reportedly cut big banks’ earnings per share by a median of 7.4% based on 2021 estimates, according to Morgan Stanley analyst Betsy Graseck. Bank stocks edged up Wednesday afternoon.

“We are now unlikely to get a corporate tax rate hike,” said Fred Cannon, research director at Keefe, Bruyette & Woods.

There was more good news for Wall Street in several key Congressional races. Preferred lawmakers from many banks declared victory overnight, leaving the makeup of the House of Representatives and Senate banking committees largely untouched.

Reporting by Svea Herbst-Bayliss in Boston and Chibuike Oguh in New York; Additional reporting by David Henry and Jessica DiNapoli in New York; Edited by Greg Roumeliotis and Matthew Lewis

Original © Thomson Reuters

Originally posted 2020-11-04 11:16:11.

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