Elon Musk has always been an eclectic sort. He likes to make unusual comments, usually over Twitter. Over this past weekend, Mr. Musk mysteriously tweeted out, “What does the future hodl?”. “Hodl” is shorthand for “hold on for dear life” and the tweet was thought to be a reference to the current upheaval in cryptocurrency markets. Who knows what Mr. Musk really meant. This wouldn’t be the first time the eccentric entrepreneur has gone out of his way to be vague.
Maybe Mr. Musk was reminding his SpaceX astronauts to hold on. Last week, the space company successfully sent four astronauts to the International Space Station. He’s sent astronauts into space before, but this time SpaceX was able to reuse much of the rocket and capsule from a previous mission. Reusing equipment is the key to making space exploration much more affordable and efficient.
Maybe Mr. Musk is referring to his upcoming appearance on the comedy show, Saturday Night Live, in a few weeks. As a long-time fan of SNL, sketch comedy on live TV is no easy task. It’s not a sitcom where mistakes can be edited out. Can he pull it off? Not all celebrities can act (remember when Paris Hilton hosted?). Most likely it’s Lorne Michaels, SNL’s longtime producer, that will need to hold on for dear life.
Maybe Mr. Musk is referring to the upcoming earnings report for his other company, Tesla (TSLA). The electric automaker is expected to post strong numbers, probably by the time you read this. Expectations for Tesla are unbelievably high. Tesla isn’t the only big tech company to report earnings this week, either. Other big tech names that will be reporting this week include Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Facebook (FB), and Microsoft (MSFT). It’s going to be a busy week in general. Over one third of all the companies in the S&P 500 will be reporting this week. With so many tech companies coming off a banner 2020, expectations are sky high.
Maybe Mr. Musk is referring to the prospect of paying almost twice as much in taxes when he sells his Tesla holdings. To fund a raft of social spending measures, President Biden is floating the idea of increasing the long-term capital gains tax rate from about 20% to over 40%. A huge move. Thankfully, he’s only proposing that this change would hit families making over a million dollars a year – about one out of every three hundred families. Estate tax increases are also on the drawing board.
These combined tax changes could be huge and have drastic ramifications for how Apriem delivers our financial planning advice. But what do these tax changes mean for the equity markets? Over the weekend, numerous market strategies have pointed out that history shows probably nothing major (Schwab’s Liz Ann Sonders). Changes in capital gains taxes are just one of many factors and have little impact on the markets (Fidelity). In fact, markets are usually higher in the months and quarters following a tax increase (Bloomberg/Factset/Goldman Sachs). Remember that many investors hold stocks in tax advantaged accounts like IRAs, 401(k)s, and pension plans. Less than one third of equity holdings are in taxable accounts. Take that conventional wisdom!
Although history has shown that overall markets fare quite well when taxes are raised, I am not predicting that the markets are only destined to go higher. Some companies could be more exposed to higher capital gains taxes than others. Technology companies have performed extremely well in the past few years and now have a tremendous amount of embedded capital gains. Tesla is a prime example. Currently valued at $700 billion dollars, almost all of Tesla’s gains, $650 billion, were accrued in just the last eighteen months. Of course, the forward-thinking Mr. Musk is always one step ahead. After making his money in California, he recently moved to the tax-friendly state of Texas. What does the future hodl? For Elon, probably a lot more barbeque.
– Ben