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Tax Changes Alter Money Supply

Hey 5-Star Trader,

Late last week President Joe Biden announced his plan to raise taxes on capital gains. Though no changes have been implemented, the news certainly did (and will continue) to affect the behavior of the market. The question is, “Where do we go from here?”

Action in two different ways…

The stock market is arguably the best wealth generation vehicle of all time. Raising taxes related to this wealth generation vehicle will inevitably hamper that vessel. Investors won’t be happy about this and will likely start to look for other opportunities with smaller tax liabilities. If Biden’s plan disproportionally taxes the stock market, perhaps they move cash into cryptocurrency; metals like gold and silver; or real estate…

Another possibility of this tax increase is changing the way investors use their gains. Instead of selling off their gains, they could choose to hold them for longer in order to decrease their tax liability for a given amount of time. But either way, you can guarantee that investors will look for methods of investing in varying areas with lower tax liabilities and do what they can to avoid higher tax payments.

Unknowns ahead…  

After Biden’s announcement, the market immediately played to the downside, but later found some strength. That initial blip downward was nothing other than an emotional reaction. Right now, we are seeing the market hold strong. With no real news on what exact changes are to be made, it seems like for now there will be no immediate impact on the market. Why? Millionaires aren’t going to start dumping millions of dollars of equities without knowing what is going on first.

If the taxes ever pass (which may be doubtful, as you know the people who have to vote in favor of higher taxes are likely millionaires and invested in the stock market themselves) it still wouldn’t be something I would act on immediately in terms of allocations or trades. However, it will make me consider how I allocate cash — whether that is in the stock market, in real estate, in gold, or bitcoin.

My future plays…  

So as far as what to do right now — nothing. Why? There is nothing we can do about potential higher capital gains taxes right now. But, we can look for infrastructure plays based on the president’s proposed infrastructure bill. I’m eyeing car companies as well as solar producers and installers.

I like Ford (F) in addition to my favorite, Tesla (TSLA), but I even like General Motors (GM) here. Think about companies that create battery technology, those who produce it, and those that sell it. We also have to consider companies that are building out charging networks.

Blink Charging (BLNK) is my favorite in this space. In addition, I’m also eyeing firearm manufacturer stocks which will likely benefit from Biden’s anti-gun stance. Smith and Wesson (SWBI) in particular could be a good play as gun sales and gun manufacturer’s profits have gone through the roof through Biden’s presidency so far.

So while we can’t trade the capital gains potential tax hike right now, there are still opportunities based on the incoming political policies. Nothing has been set in stone, and I suggest considering pullbacks as potential buying opportunities.

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