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Market reaction to Biden’s capital gains tax proposal is ‘a bit overdone’: Strategist

Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss outlook on the bond market and Biden’s capital gains tax proposal.

Video transcript

ALEXIS CHRISTOFOROUS: Let's get more on the markets now with Kathy Jones, chief fixed income strategist at Charles Schwab. So Kathy, I'm sure you were watching the play by play here in the market, as were we. The market took a turn for the worse on this Bloomberg report that President Biden next week is going to propose raising the capital gains tax on those making a million dollars or more a year to a whopping 43.4%. We saw the response to the market was swift to the downside. Is the market overreacting here as they try to absorb this news? What's your take?

KATHY JONES: Well, yeah, I think the immediate reaction is probably a bit overdone. You know, these proposals come out, but you never know, especially with tax proposals, where we'll end up. So it looks like an opening bid. I'm sure there will be intense lobbying from the investment community to adjust those numbers. But, you know, I think at the moment, when you have very high valuations in the market, anything that sort of is bad news can spark a bit of a sell-off.

KRISTIN MYERS: So to that point then, because we've heard some folks talk about potential corrections up ahead, could this be that catalyst that the market needs to the downside for a potential correction?

KATHY JONES: Well, I don't know if it'll materialize into a full correction until we get the numbers and then the likelihood of whether it actually passes. But it certainly could stimulate a bit of a sell-off here, and, again, something that tempers some of the enthusiasm and brings valuations back in line. But I'd say it's early days to know what our tax policy is going to look like next year or later this year.

ALEXIS CHRISTOFOROUS: As a chief strategist there for fixed income at Charles Schwab, curious what you're seeing right now in terms of investor appetite for the bond market. Where are you seeing the most activity at the moment?

KATHY JONES: People still want to go into credit, into the riskier parts of the market, where you still get some yield and you get the benefits of shorter duration and the boom from the economic outlook. So we're seeing still a lot of popularity in things like high-yield bonds, bank loans, which, presumably, although they're very low in terms of credit quality, if rates rise, if the Fed raises rates, that they'll benefit as well. And they're staying away from longer duration bonds because of the risk of higher yields down the road.

KRISTIN MYERS: I wanted to dive into that a little bit. What were you expecting, or what are you expecting, both in the short term, but also a longer term view, at least when it comes to inflation and interest rates? We've heard so far that some of the moves that we've seen lately are expected to be transitory. But there are concerns in the longer term.

KATHY JONES: Yeah, I think that inflation does have the potential to move up in sort of a short, intermediate, and long-term window. So, in the short-term, we have these base effects, which are giving us a lift. And we all knew that, and the market adjusted for that quite some time ago. And now we're pausing as some of those numbers come through. But we are hearing a lot from companies on their earnings calls, talking about being able to pass through, or at least, planning to pass through, some of their increased costs on to consumers.

And we're seeing a couple of companies this week come out with indications that they are raising prices. So that makes us think that perhaps in the intermediate term, we are going to get higher inflation than we might have thought a year or two ago. And now, longer term, you know, when I talk longer term at a time like three to five years down the road, there's still a lot of developments that we have to keep an eye on. But I would say the risk is still to the upside in inflation. And that's why we think yields can continue to move higher.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Kathy Jones of Charles Schwab, thanks, as always.