Markets Rebound on Financial Rescue Efforts

March 17, 2023

Strong actions from regulators, central banks, and big banks helped power the S&P 500 to a 1.43% gain for the week. Trading was volatile for much of the week, capped off by Friday’s “triple witching”, which saw equity futures and options contracts tied to individual stocks and indexes as well as exchange-traded funds all expire in afternoon trading, which led to the day’s down session. Markets still managed a winning week as regulators continued to take swift actions to restore confidence in the banking system. Late Sunday night Federal officials announced they were insuring all depositors (above the standard $250K) in failed Silicon Valley Bank and making additional funding available for other banks. Regulators also moved to close crypto-focused Signature Bank, citing systemic risk. Global central banks were also hard at work restoring confidence in the global financial system. On Wednesday, the Swiss National Bank announced it would provide liquidity to Credit Suisse as a high rate of customer withdrawals over the last several months sparked investor concerns the lender would follow in Silicon Valley Bank’s footsteps. Credit Suisse took the central bank up on its offer, borrowing up to $54 billion to strengthen its liquidity and restore confidence. Thursday brought an 11 bank cohort together to pledge $30 billion to First Republic Bank, another embattled regional bank which has also experienced significant withdrawals from clients with big balances in excess of the $250K FDIC Insurance cap. With eyes focused on the banking industry, investors were quick to dismiss the week’s inflation and retail sales reports as they look ahead to next week’s Fed meeting.

Inflation Remains Hot

Consumer prices continued to rise in February, up 0.40%. Year-over year, prices were up 6.00%. That’s well off their July 2022 peak of 8.93%. February’s headline figure was held in check by a -0.60% decline in energy prices which helped offset a 0.80% rise in shelter costs. The surge in shelter costs accounted for over 70% of the increase in February but is expected to moderate as the year progresses. Core CPI, which excludes food and energy, continued to come in hot, rising 0.50% month-to-month and up 5.50% on a 12-month basis. The gains were broad-based with shelter, recreation, motor vehicle insurance, operations, and airline fares all moving higher during the month. Although inflation has been trending lower, it still remains elevated and broad-based, which suggests the Fed will continue its fight against inflation.  

Retail Sales Soften Following Strong January

Retail sales fell -0.40% in February, pulled lower by drops in auto sales and restaurant and bar receipts. The month-to-month slide comes on the heels of an exceptionally strong January, which saw sales rise an upwardly revised 3.20% from a previously reported 3.00%. In February, consumers continued to pull back from buying cars, pushing sales down -1.80% as high prices and rising borrowing costs kept them away from the dealer lot. Dining out also fell out of favor after several strong months of gains as consumers looked to cut back on their discretionary spending amid high prices. Despite the slide in the headline figure, consumers continued to spend on select categories. Sales excluding gasoline stations, car dealers, building-materials stores and food services (the control-group used to track the underlying pace of consumer spending) rose 0.50% in February. That follows January’s upwardly revised 2.30% rise. Overall, consumer spending remains relatively healthy, supported by a strong jobs market and savings. Bank of America recently reported March inflows into customer savings and checking accounts relative to outflows remain in good shape and median bank balances continue to be elevated for middle and lower income households. Lower income households (<$50K) continue to hold up relatively well despite dipping into their savings buffers. Their level of savings remains nearly 50% higher than the 2019 average. With the summer travel season quickly approaching, consumer spending could continue to pick up.  

Final Thoughts

Heading into Friday’s trading session, the S&P 500 was up 2.56% for the week as swift regulatory actions looked to soothe investor concerns. However, the day’s options expiration led to a volatile finish to the week. Next week is poised to be another big week for markets as the Federal Reserve meets and its global central counterparts look to continue to reassure investors they will continue to take actions to ensure the stability in the financial system. Rates had been top of mind for investors coming into the Fed meeting, but now the troubles in the banking system look set to disrupt what has been a rather hawkish Federal Reserve. Despite the week’s developments in the banking industry, the central bank looks set to hike rates by 25 bps as it seeks to rein in inflationary pressures while also backing off from announcing a change in its rate hike path. This dovish hike will help signal to the markets the Fed’s continued commitment to fight inflation while also giving the banking industry more time to steady itself. The Fed’s meeting looks to be one of the most closely watched in years as it seeks to strike the right balance between reassuring markets it stands ready to employ its full range of tools to support households and businesses to restore confidence in the financial system while also maintaining price stability. 

The Week Ahead

With inflation rebounding and turmoil in the banking sector, the Federal Reserve will have its plate full at its FOMC meeting as it talks rates and seeks to soothe market concerns over the banking industry. Economic news will be relatively light with new home sales and durable goods orders being the highlights of the week.

What to Expect this Tax Season

The 2022 tax season is underway, and for most Americans, the deadline to file taxes for the 2022 calendar year is Tuesday, April 18, 2023. That is because April 15 falls on a Saturday this year, and the next weekday, Monday, April 17, is recognized as Emancipation Day in Washington, DC. Holidays in our nation’s capital impact tax deadlines for everyone in the same manner as federal holidays. Taxpayers who file for an extension will have until October 16 to file.

The IRS kicked off the tax season with 5,000 new customer service representatives intended to help slash call wait times and decrease the processing times for returns. In recent years, the IRS has been under fire for delays in processing returns, difficulty providing taxpayers with access to customer support over the phone and in person, and delays in filers receiving refunds. 

In 2022, only 13% of 173 million calls reached an IRS representative. That was up from 11% in 2021, but average hold times increased to 29 minutes from 23 minutes. During the pandemic, the agency was tasked with the additional responsibility of issuing multiple rounds of stimulus payments along with monthly child tax credit payments to millions of Americans. Given staff shortages and other pandemic-related disruptions, it was no surprise that the beleaguered agency struggled to fulfill its responsibilities.

At the beginning of this year’s tax season, the IRS had a backlog of 10 million unprocessed tax returns from prior years, but it was reported in mid-February that the agency had processed approximately 40 million federal income tax returns since tax season began on January 23rd. The IRS expects more than 168 million filers to submit their returns by the April 18 deadline and encourages Americans to file electronically with direct deposit in order to avoid potential delays and receive their return within 21 calendar days.

Residents of disaster areas in Alabama, Georgia, and California have until October 16 to file their federal taxes. Parts of Alabama and Georgia were hit with severe storms and tornadoes in January 2023, and California was hit with severe winter storms that caused flooding, landslides and mudslides between December 2022 and January 2023 in much of the state.  When the Federal Emergency Management Agency issues a disaster declaration, the IRS will offer tax relief to individuals and households that reside or have a business in that area. The tax relief postpones various tax filing and payment deadlines, including 2022 individual income tax returns normally due in April, as well as 2022 business returns normally due on March 15 and April 18. It also gives taxpayers affected by a disaster additional time to make 2022 contributions to their IRAs and health savings accounts.

Tax rules vary from year to year and from person to person depending on an individual’s filing status, age, income and other factors. Be sure to speak with a tax professional or Certified Public Accountant about your individual tax deadlines and any tax credits or deductions you may qualify for along with other tax concerns or questions.