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The Tell: Here’s an $800 billion reason why the stock market can keep rising with Tax Day in the rearview mirror: Fundstrat’s Lee

Investors scrambled for reasons to explain a sharp stock-market surge Tuesday that saw the Dow Jones Industrial Average jump nearly 500 points as major indexes turned in their best performance in a month. A look at the calendar may offer the best explanation, argued Fundstrat co-founder Tom Lee.

“Equities have fallen in a straight line since late March (13 trading sessions) and the decline continued into April 18th,” the deadline for filing federal income tax returns, Lee said in a Tuesday note.

The note highlighted research that shows stocks have tended to suffer in the runup to “Tax Day,” as investors raise cash to pay Uncle Sam, often followed by a sustained bounce in years when investors face hefty tax bills (see chart below).

Fundstrat

They faced a doozy after another big year of gains for equities in 2021, Fundstrat has estimated, putting total capital-gains taxes on equities at a record of more than $800 billion, along with another $150 billion or more for crypto-related capital gains.

Fundstrat found that since 1945, post-Tax Day returns have been strongest following a big up year for the S&P 500, defined as in the top two deciles. The 29% advance for the S&P 500 last year was just shy of the cutoff for the top decile at 29.6% (see chart below).

The Dow
DJIA,
+0.71%

jumped 499.51 points, or 1.5%, Tuesday to close at 34,911.20, while the S&P 500
SPX,
-0.06%

rose 1.6% and the Nasdaq Composite
COMP,
-1.22%

advanced 2.2% — the biggest percentage gains for all three indexes since March 16, according to Dow Jones Market Data.

The Dow rose for a second day Wednesday, rising nearly 249.59 points, or 0.7%, while the S&P 500 ticked down 0.1% as shares of Netflix Inc.
NFLX,
-35.12%

plunged more than 35%.

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