Friday, April 17, 2009

April tax collections could stall this rally



You may have heard the expression, "Sell in May and go away," when it comes to the stock market. There's a very good reason for that: Taxes. On April 15 each year millions of Americans must send a check to the tax man. That leaves less disposable income in the economy until ongoing government spending replenishes it. (That's the summer rally.)

This year the tax effect might be fairly strong. With households stretched any reduction in disposable income could hurt the economy.

There is a bright side, though. During prior recessions tax payments to the government were relatively low and that old axion of sell in May and walk away, didn't work very well.

My recommendation is that if there is a correction, use that as an opportunity to buy stocks.


April deficit/surplus and the S&P 500 Index one-year later




The pink line is the April fiscal surplus or deficit and the blue line is where the S&P 500 index was one year later. Stocks usually bottomed following April deficits or weak surpluses (1983, 2003-2004), whereas big surpluses (2000, 2007) presaged a peak in stocks, followed by sharp declines.

3 comments:

googleheim said...

it might also depend on how many people will be wary to put their max IRA or 401K contribution into their fund or keep it out.

i don't know how many people wait to the last minute ( they have until october for some types of funds )

mortgageangel88 said...

My husband and I are not contributing this year. And maybe not ever again. It seems probable that we'll be taxed at a higher rate when we retire 20 years from now.

Mike Norman said...

Angel,

Yes, this is unfortunately a function of a flawed belief system at the policy level that says the government needs to have revenues to make the invesments we need to remain prosperous. And it is thought that those revenues can only come from private savings, but in actuality, it is the other way around: deficit investing (a.k.a known as deficit spending) raises the savings of the private sector. As long as policy operates under this false paradigm, I do not blame you for not wanting to contribute to your IRA. And isn't that a little microcosm of the self-defeating nature of this belief system? More people like you will put less in 401ks, thus providing less capital to our engines of growth, which is exactly the opposite of what the government is trying to achieve. Yet it fosters this!