[Good Morning Stock Market] Biden's Infrastructure Policy and Tax Increase: "Calculating Market Impact Is Complex"

[Asia Economy Reporter Lee Seon-ae] Some parts of the Biden administration's second fiscal stimulus package will be unveiled on the 31st (local time). This stimulus package, which focuses on infrastructure investment with a budget exceeding $3 trillion (approximately 3,390 trillion KRW), is divided into △'physical' infrastructure investments such as civil engineering and eco-friendly projects △social infrastructure investments such as education and healthcare. However, tax increases to secure funding will also be implemented. U.S. Treasury Secretary Janet Yellen stated that this infrastructure plan will be accompanied by tax hikes. Accordingly, the calculation of market impact has become complex as the effects of tax increases and economic improvement intertwine.

◆Mixed Close on New York Stock Exchange= On the 29th (local time), major indices on the New York Stock Exchange closed mixed due to the impact of a large block deal (massive trade) and other factors.

On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,171.37, up 98.49 points (0.30%) from the previous session. The Standard & Poor's (S&P) 500 index fell 3.45 points (0.09%) to 3,971.09, and the tech-heavy Nasdaq index dropped 79.08 points (0.60%) to 13,059.65.

The Dow Jones Industrial Average closed at an all-time high, marking its 17th record high this year alone. The market was watching the aftermath of a $30 billion block deal on the 26th, concerns over the resurgence of COVID-19, and the Biden administration's stimulus package.

The block deal was reportedly due to hedge fund Archegos Capital Management liquidating positions following margin calls caused by losses. New York market experts believe that while the Archegos incident adds uncertainty to the market, the resulting volatility is expected to be temporary. Luke Phillips, Head of Investment at SYZ Private Banking, told the Wall Street Journal, "We still don't know the main reasons why hedge fund Archegos had to liquidate," adding, "This exacerbates the uneasy events happening in the market."

[Image source=Yonhap News]

◆Infrastructure Policy Including Tax Increases= The market is focusing on the additional stimulus package that President Biden will announce in a speech in Pittsburgh on the 31st. President Biden is expected to announce infrastructure and education-related policies totaling $3 trillion. The policy is also expected to include tax increase proposals, drawing attention to their potential market impact.

Generally, raising the corporate tax rate reduces corporate net profits, but if the stimulus package improves the overall U.S. economy and sentiment, it could be beneficial for companies, making it difficult to simply weigh pros and cons. So far, President Biden's camp has pledged to raise the corporate tax rate (from 21% to 28%), increase the minimum tax rate (GILTI) on profits earned by U.S. companies through foreign subsidiaries (from 10.5% to 21%), raise the top income tax rate for high earners with annual income over $400,000 (approximately 450 million KRW) (from 37.0% to 39.6%), and increase the top capital gains tax rate on stock and real estate gains (from 20.0% to 39.6%). The exact scale of the tax increases remains uncertain.

David Lefkowitz, Head of U.S. Equities at UBS Financial Services, told MarketWatch, "The corporate tax rate hike could moderately pull down the U.S. stock market, but American companies are still expected to achieve healthy net profit growth." He also predicted, "Since the tax increases are at least partially intended to fund infrastructure-related spending, this will boost economic growth and partially offset the stock market decline caused by the tax hikes."

◆Jeong In-ji, Yuanta Securities Researcher= The KOSPI closed slightly lower yesterday amid a sideways trend. Foreign investors were net buyers in the KOSPI market, but net purchases dropped significantly to 49.4 billion KRW compared to 295.7 billion KRW last Friday, with selling pressure mainly from financial investment sectors. Although the KOSPI shows some instability, steady rebound attempts around the 2950 level suggest that a full-scale correction has not yet begun. However, the somewhat unstable factor is the trend of the exchange rate. Generally, in technical analysis, the 120-day moving average is called the business cycle line and is interpreted as a turning point for long-term trends.

For the KOSPI, the 120-day moving average is around 2900 and is rising, so the market is not yet considered to have entered a long-term correction. However, the dollar index and the USD/KRW exchange rate have already broken above their 120-day moving averages and are forming an upward trend. In early 2018, these exchange rate indicators had been below the 120-day moving average for a long time before breaking above it, after which the KOSPI entered a full correction. Therefore, attention should be paid to the movements of these exchange rate indicators. Of course, if these indicators fall back below the 120-day moving average and lose momentum, the stock market could continue its upward trend, but since warning signals have appeared, caution is necessary.

This content was produced with the assistance of AI translation services.