What COVID-19 means for the future of tax planning

Stephen Dover, Franklin Templeton Chief Market Strategist. joins Yahoo Finance Live to discuss the impact of raising capital gains and outlook for the stock market.

Video transcript

- So you just heard our big tax debate. Let's get another view on all of this from someone who is actually in the market. Stephen Dover is Franklin Templeton chief market strategist. Stephen, good to see you. So I think you heard the conversation that we were having about the potential increase in these tax rates, whether you're talking about on investments or the corporate tax rate for that matter. How are you thinking through these issues? Do you think that the steep drop yesterday was justified?

Well, I don't think the drop was just about taxes. Your conversation was really interesting. If I could just add a couple of comments. Why did we have a capital tax? It was because we wanted to have capital formation. We thought that we needed a lower tax rate in order to get people to invest in the market.

So this is a philosophical change and I would argue somewhat of a-- if you can use this term-- a windfall of profits tax. The markets have been up. The wealthy have disproportionately done well because of the markets, so this isn't about raising revenue. This is about income redistribution.

I'd add that we talked about the profits on capital gains tax, but there's also a proposed tax on estates on the stepped-up basis. So those are serious taxes as well. Where you're going to see the impact is that people are going to be much more tax aware in how they invest. And the biggest impact is going to be on people who have embedded tax gains, people who have been investing for a long period of time have huge gains and haven't sold it, and how that is going to transition will have a big impact on the market.

- Stephen, to that point, from what the research that I've seen out this morning, this tax rate, even if it's not 43.4%, let's say maybe it's 30%, whatever it is, it's likely to go higher. So the day that's announced, why won't stocks fall off? Why won't they fall off a cliff? If people are going have to pony over more money to be an investor in the stock market, why not sell winning positions and just hold on to the cash here until you figure out your tax strategies?

STEPHEN DOVER: Well, I don't know what would happen on the day. I think that if you thought that if you have an embedded tax gain, if you held on to your stock for many years and you have a big game, there's an argument you should sell today and tax that at the lower rate, if you think you're going to be taxed at a higher rate later. So tax planning is going to be very important and how this is phased in is going to be very important.

It's going to be a lot of debate back and forth about this over the coming months, but I think that people will have to make decisions in anticipation of what their future tax is going to be.

- All right, there we see live pictures from the floor of the New York Stock Exchange. Agiliti ringing the bell on this Friday morning, as we look set to open up the final day of trading on this busy week, earnings season really kicking into gear this week, and it's only going to get more busy in the weeks ahead. We'll see where markets settle as they get open.

Stephen, obviously, taxes are the flavor of the day, but if we had had this conversation just a couple of days ago, we might be talking more pointedly about what's been happening in the rates market, specifically in treasuries and how that has been shaping the conversation around markets over the last several months. How are you guys thinking about the yield curve today, a 10-year, 160 or so.

The move was abrupt we have seen things calm down a little bit. Did this create more interest? I mean, does this start to get to a level where folks are interested in actually capturing a 1.5% yield, and how is this feeding into conversations about portfolio construction today?

Well, it feeds into portfolio construction decisions, both on the equity as well as on the fixed income side. On the equity side, I've heard more discussions about growth stocks having duration than I ever have before. So we take that into account. We're generally overweight at this point, stocks that are still going to recover, as the economy expands. The cyclicals, we still think there's still opportunity there.

We're in a show-me-the-money market in terms of earnings. Earnings 80% of the stocks to beat, and yet, we haven't seen the gains that we might have thought we would see. So I think forward guidance is going to be important. In terms of fixed income, we're still cautious about duration, although we think having some duration as a ballast, and your portfolio is still important, but we tend to overweight spreads.

So we're looking at high-yield markets. We're looking at bank loans. We're looking at selected emerging market opportunities. So we still think that probably the better opportunities of the fixed income markets are in the spread rather than in duration.

- Interesting. Good to have some nuance here, as we see some of these gyrations in the rates market. Thanks, Stephen. Good to see you. Stephen Dover's Franklin Templeton chief market strategist. Thanks.