Wall Street shows it's none too pleased with US tax proposal
Financial markets are sensitive creatures. They constantly wonder what the future will bring, and a simple que sera, sera will hardly do. Markets need encouragement. Not just a kind word now and then from Washington , but also the promise of being pretty and rich one day.
So when talk turns to Major Tax Reform, and this includes bold plans to narrow down capital-gains tax breaks, and when Washington also takes aim at conditions on corporate depreciation - financial markets get kind of weepy and concerned.
Add to the tax concern other troubling news the markets are hearing: The economy is clearly slowing now. Retail sales are sluggish. The money supply expanded so greatly the past week that the Federal Reserve may now have to tighten the supply to compensate. And we are coming up on the year-end tax-selling season.
Is it any wonder that the stock market has been jittery? The Dow Jones industrial average closed Friday at 1,188.94, down 31.36 points for the week. And not many analysts are very hopeful about the near future.
''The uncertainty of the tax plan may cause a freeze in economic activity,'' says Newton Zinder, chief market analyst at E. F. Hutton in New York. ''Investors have no idea of what the return on their investment will be and how capital spending will be affected by these new proposals.''
From the institutional investor's point of view, Mr. Zinder says, the removal of rules for accelerated depreciation enacted in 1981 could ''hurt a number of industries.'' Adding in economic signals (the index of leading indicators fell 0 .7 percent in October), he concludes, ''There look like a lot of reasons not to buy - and some to sell.''
From the individual investor's viewpoint, Mr. Zinder says, the proposed changes to capital-gains provisions would increase the maximum tax on the profitable sale of stock (held more than six months) from 20 to 35 percent.
That would be a major disincentive to investment, especially in risky enterprises - as many economists and financiers are arguing. And the arguing is getting louder all the time.
Supply-side economist George Gilder, writing on the editorial page of the Wall Street Journal last Friday, attacked the Treasury Department's tax proposals as a direct assault on the venture-capital and new-equity markets. He attributed the economic recovery largely to the 1981 tax cuts and said these benefited entrepreneurs who, in turn, led the economic surge.
But ''in defiance of the President's promise not to raise taxes, the Treasury recommends nothing less than a 75 percent boost in the most crucial tax rate of all,'' Mr. Gilder said.
His reaction seemed to reflect the entrepreneurial, corporate, money-management, and Wall Street points of view. The Reagan administration's tax plan is clearly unpopular among those very influential groups.
But as the initially negative reaction runs its course, another line of thinking is emerging, if only slightly. This is the thesis that, because of powerful opposition, the tax plan is dead in the water - or, at least, that it will not see the light of day in its current form.
Brave investors, they say, might take advantage of the current weakness in the market to buy good stocks cheap. But even Wall Street analysts who embrace this thesis nonetheless feel the market will not improve right away.
''I do know that the tax plan as proposed adds technical problems to the stock market,'' says David M. Polen, who heads a New York money management and brokerage firm. ''But I'm still fairly constructive on stock prices. I think (the tax worries) are making prices cheaper, and that is creating buying opportunities.''
Mr. Zinder agrees, noting that even if tax revisions that hurt investment are enacted, this will not occur until late '85, and they probably wouldn't be phased in until '86 or later, ''so there's no need for harsh action.'' But he admits, ''It's hard to convince people of that.''
Tax plan or no tax plan, the market was due for a ''correction'' about now, says David M. Kalman, a technical analyst with the W. H. Newbold's Son & Co. brokerage in Philadelphia.
''There hasn't been just one problem with the market,'' he says, referring to the tax plan. ''There are other features that will create further distress.'' Among these are big jumps in the Dow utility average and in the bond market over the past six months.
Mr. Kalman sees an environment today ''that will be corrective over the next 12 to 16 weeks. It won't be down each week, but it will be more rewarding to sell into strength than to buy into weakness.''
In the weeks ahead, Mr. Kalman says, the industry groups that may decline the most will be automobiles, defense, and retailers. Holding their own will be interest-sensitive stocks such as utilities (after a brief drop) and drug manufacturers.
Interest rates Percent Prime rate 11.25 Discount rate 8.50 Federal funds 9.00 3-mo Treasury bills 8.69 6-mo Treasury bills 9.10 7-yr Treasury notes 11.45 30-yr. Treasury bonds 11.55 Source: Bank of Boston