October 9, 2020
Markets continued to rally for the first full week of October, sending the S&P 500 up for a second consecutive week. Like last week, the move was spurred by hopes that Republicans and Democrats will strike a stimulus deal to help millions of Americans amid the on-going pandemic. The last stimulus package provided a much needed boost to consumer spending, lifting imports of consumer goods to a 14-year high in August as reported by the Commerce Department. The aid also gave the U.S. services industry a shot in the arm, helping the ISM Services Index surpass its pre-Covid level. Overseas, China’s economy continued to gather steam with the services sector expanding for the fifth consecutive month. For the week, most major indices rose nearly 4.00%.
U.S. Trade Deficit Hits 14-Year High
The gap between what the U.S. buys and sells from the rest of the world widened in August by 5.90%, or $67.1 billion. On a year-to-date basis through August the trend was nearly identical with the trade deficit widening by 5.70% from the year ago period to stand at $421.8 billion. Both imports and exports rose for the month – just at differing rates. Imports rose 3.20% while exports rose 2.20%. The growth in imports was driven by a surge in consumer demand for furniture, clothes, pharmaceuticals, and computers. These goods tend to be manufactured primarily overseas, thus leading to higher imports. Fortunately, many of these imports have found their way to U.S. retailers, whose earnings will likely benefit from families outfitting themselves to spend more time living and working at home.
U.S. Service Sector Surpasses Pre-Covid Level
The Institute for Supply Management Services Index rose for the fourth consecutive month, hitting 57.8 in September. That was up from August’s reading of 56.9 and February’s pre-pandemic level of 57.3. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. A rise in new orders and employment helped drive the index higher in September. The month’s reading is encouraging as it covers a period where we’ve seen Covid-19 surge once again and as some businesses have faced renewed operating restrictions in parts of the U.S. With the index able to push higher into expansion territory in September, it fortunately shows that the reopening factor continues to be the greater force in the economy.
China’s Service Sector Gathers Steam
The Chinese service sector grew for the fifth straight month in September. The Caixin/Markit services Purchasing Managers’ Index rose to 54.8 from 54.0 in August. September’s reading was the highest since June, helped by growth in domestic demand for new orders and increased hiring. In recent years, China has worked to diversify its economy away from purely export-led growth and to focus increasingly on domestic demand. The services sector now accounts for about 60% of the economy and half of urban jobs. With the pandemic now playing less of a factor in China, Chinese consumers are feeling more confident to travel and spend. 637 million people hit the road during China’s National Day, an Autumn festival spanning 8 days which began on October 1st. With the holiday having just concluded, it is estimated that nearly $70 billion in revenue was generated during the period, reflecting a strong rebound in activity from May when only 115 million trips were made during an equivalent five-day holiday.
This week’s performance was emotionally influenced. With polls widening in support of a Biden/Harris ticket, performance was attributed to two factors. The first being that the markets now seem to believe that the margin of victory will be large enough to avoid a contested election which has reduced the market’s overall anxiety. The second factor is outright paradoxical, but the rationale goes something like this. According to the purveyors of this theory, the market had been fearful of what impact a “blue wave” could mean for the economy. Trump had generally been viewed as pro-growth, or at least pro-investor, and Biden viewed as pro-tax and pro-regulation. This week, markets flipped according to mainstream financial media, and we’re all Keynesians again. Investors are now enlightened, understanding that the government spending and infrastructure projects funded by taxes and wealth reallocation are simply stimulus by another name, unlocking economic growth that more than offsets its cost. The problem with this is what it has always been. Governments are not efficient allocators of capital, so to the degree markets may have chosen to look at this week’s polling numbers with a cup half-full attitude, they’re likely not going to be nearly as optimistic should the details of the policies become reality.
The Week Ahead
It will be a big week for markets as the Q3 2020 earnings season kicks off. We’ll also have the latest reports on U.S. retail sales and inflation. In overseas news, China releases September import/export figures.
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Important Tax Deadlines: October 15, 2020
Earlier this year, the IRS postponed the usual tax deadline from April 15th to July 15th due to the pandemic. However, for taxpayers who filed an extension, the extended tax deadline remains the same – October 15th, 2020. Below are several important deadlines to note. Almost everyone agrees that the tax code is complicated so be sure to consult your tax advisor.
Federal Income Tax
The nationwide final deadline for filing an individual federal income tax return (Forms 1040, 1040A, 1040EZ) for tax year 2019 is October 15th for those who filed for an extension. Some taxpayers are entitled to an automatic extension, such as members of the military and others serving in combat zones or hazardous areas. Additionally, taxpayers affected by natural disasters may have extra time. For more details, check the disaster relief page on the IRS website.
Removal of Excess (ROE)
October 15th also marks the deadline for the removal of excess (ROE). “Excess contributions,” as the IRS refers to them, typically occur when individuals unintentionally deposit funds that are not permitted to be made to IRA accounts. If you discover that you contributed amounts to your traditional or Roth IRA in excess of the allowable limits, the IRS allows these excess amounts to be corrected without penalty for the prior year provided the correction occurs by the deadline.
Recharacterization
Recharacterizing an IRA means undoing an IRA conversion and putting the funds back into a traditional IRA. An IRA conversion, also known as a rollover, generally refers to the act of transferring assets held in a traditional IRA, or a similar retirement account, to a Roth IRA. In 2018, as part of the Tax Cuts and Jobs Act, recharacterization of Roth IRA conversions from traditional IRAs and qualified plans (such as 401ks) was repealed. As a result, all Roth conversions taking place on or after January 1, 2018, are permanent. However, recharacterizing Roth contributions is still permitted. Roth IRA contributions for 2019 may be recharacterized to a traditional IRA by October 15th with an extension.
Workplace Retirement Plans
Self-employed taxpayers and business owners should be aware that the extended deadline for Simplified Employee Pension (SEP) IRA, Employer Savings Incentive Match Plan for Employees (SIMPLE) IRA, and Solo 401k contributions for 2019 is also on October 15th.
Extra Time to File but not to Pay
As a reminder, the extended deadline gives taxpayers extra time to file a return, but not extra time to pay any taxes that may be owed. Late tax payments are typically hit with a penalty of 0.5% per month plus interest. Extension filers who miss the October 15th deadline will incur a late-filing penalty, which is typically 5% per month but can run as high as 25% of the amount due.
The IRS has been working through a backlog of paper tax returns and correspondence due to the pandemic and recommends taxpayers file returns and make payments electronically if possible.