February 4th, 2022
Punxsutawney Phil made it official on Wednesday, predicting six more weeks of winter before a cheering crowd in Pennsylvania. While many of us were contending with the wintry affects from Phil’s prediction this week, the celebratory mood on Gobbler’s Knob managed to extend to Wall Street where the S&P 500 mustered a second consecutive weekly gain. Blowout earnings from mega-caps Google, Amazon, and UPS reignited bullish sentiment, but that was tempered in part by the strength of January’s jobs report and inflation concerns, causing the 10-year treasury bond yields to jump to 1.92%. The 10-year is now at its highest level since January 2020. Economists had widely expected that the rise of Omicron would dent hiring for the month, but businesses managed to navigate around the variant, adding 467K to their payrolls. Factory floors and service businesses also managed to keep Omicron at bay with both the ISM Manufacturing and Services indexes continuing to expand for the month. With economic and earnings reports showing resilience in January, the S&P 500 skated to a 1.55% weekly gain.
How About Them Payrolls
Prior to its release on Friday, Wall Street had been ready to throw in the towel on January’s nonfarm payrolls over fears that the Omicron variant would stall hiring. Coming into the week, the consensus estimate was that only 150K new hires would be added, but workers and hiring managers brushed off the variant, adding 467K to the payrolls for the month. Surprisingly, in-person jobs such as leisure and hospitality led the way in new job creation. The sector managed to add 151K jobs. Professional and business services also scooped up talent during the month, adding 86K new hires. It remains a job seeker’s market. Wages surged 0.70% for the month and are now 5.70% higher than they were a year ago. Helping matters, the report also showed labor force participation increased by 0.30%, resulting in an overall participation level of 62.20%. The combination of waning stimulus payments, the effectiveness of vaccinations, and the overall desensitization to each additional variant wave is getting more folks back to work.
Factory Floors Hold the Line
Labor shortages, supply chain bottlenecks, and rising prices failed to derail assembly lines in January. The ISM Manufacturing Index eased to 57.6 in January. This was down only slightly from December’s 58.8 reading. Despite the dip, the number remains firmly above 50, a line which indicates continued expansion in the manufacturing sector. January’s downward inflection was driven by shortages of critical intermediate materials, difficulties in transporting products, and fewer workers on factory floors due to Omicron. Those pressures should be alleviated as the current wave subsides. Prices at the factory gate also continued to increase with the survey’s measure of prices paid by manufacturers increasing to 76.1 in January from 68.2 in December. The reading suggests inflation will remain a thorn in consumer and business’s side for a bit longer. Despite the index’s slight downtick from December, demand for manufacturing remains decidedly strong.
Omicron Hits Production
Similar to the pattern seen in manufacturing, the ISM Services PMI Index slipped slightly to 59.9 in January, down from 62.3 in December. Business activity softened as Omicron reduced staffing levels and disrupted operations. The business activity sub-index fell to 59.9, down from December’s 68.3. Employment also eased with the employment sub-index falling to 52.3 from 54.7 the previous month. Comments from the ISM Services noted the public sector is finding it hard to hold on to workers. A growing number of employees have decided to jump ship to the private sector, lured by higher wages and in some instances 100% remote work options. The dip in services activity should be temporary and rebound strongly as Covid cases decline and workers hit by Omicron go back to work.
Going back just two weeks ago, the market was fretting over signs of stagflation – stalling growth, rising interest rates and inflation. Blowout earnings from mega cap names and strong economic data this week swung opinion back around and the markets along with it. Reports from Google and Amazon demonstrated that many businesses remain confident in their outlook, and businesses continue to pour billions into advertising and partnerships on their platforms. Even old school, industrial giant UPS managed to show Wall Street how it is possible to grow profits amid a challenging inflationary environment. Drawing on recent experience, analysts had been using the Delta variant as its predictor for the economic fallout from Omicron. That now appears to have been overly conservative. You can point to certain industries and aspects of the economy that have been impacted, but business has generally proven to be more resilient in keeping operations running this time around. Markets are still seeking equilibrium, hoping that the economic data remains strong on the one hand, but not so strong as to encourage the Fed to raise rates by 50 bps in March. That is the needle they are hoping to thread. This week, the market got the data it needed to set aside its slowing growth concerns, but with the huge jobs report and a Fed that claims to be “data dependent”, you could start to see interest rate concerns take center stage again if data keeps coming in hot.
The Week Ahead
Economic news will be light, but we will have consumer prices and international trade to analyze.
Tax Season 2021: Another Challenging One
The tax filing season began last week on January 24th, 2022, which was 17 days earlier than last tax season’s start on February 12th. Last year has been called the worst tax filing season ever for Americans by taxpayer advocates due to delays in processing, difficulty getting access to customer support over the phone and in-person, and delays in filers receiving refunds. Many have expressed uncertainty about whether the IRS is prepared for the more than 160 million individual tax returns for the 2021 year that are expected to be filed in the coming months.
During last year’s filing season, the IRS processed 136 million individual income tax returns and issued 96 million refunds totaling about $270 billion. In addition to its traditional work processing tax returns and refunds, the IRS was responsible for issuing three rounds of stimulus payments as well as monthly child tax credit payments to Americans over the past 15 months. The agency made about 478 million stimulus payments totaling $812 billion and sent child tax credit payments to more than 36 million families totaling over $93 billion. The National Taxpayer Advocate says that the IRS finished the 2021 tax season with “a backlog of over 35 million individual and business income tax returns that require manual processing,” which means that IRS employees have to do an additional review before a refund can be processed. It began this year’s filing season with a backlog of close to 10 million unprocessed returns from previous years, compared to fewer than 1 million in normal years.
Given staff shortages, multiple rounds of stimulus payments, and other pandemic-related disruptions, it’s not surprising that the IRS continues to fall behind. The IRS explained that the returns needing processing include about 16.8 million paper tax returns; 15.8 million returns suspended during processing that require further manual review; and 2.7 million amended returns awaiting processing. National Taxpayer Advocate Erin M. Collins wrote that, “Paper is the IRS’s Kryptonite, and the agency is still buried in it.” The National Taxpayer Advocate is the head of an independent organization within the IRS that helps improve the services delivered by the IRS. The Taxpayer Advocate delivers an annual report to Congress identifying problems within the agency and providing recommendations to solve those problems. You can read the National Taxpayer Advocate’s 2021 annual report to Congress here.
The IRS issued an urgent reminder to taxpayers this year to take extra special care when filing returns and to file electronically to reduce possible delays. The agency recently temporarily re-assigned about 1,200 employees to help with the backlog and with providing customer service for this year’s tax season. The IRS is also sending letters to filers who received stimulus and child tax credit payments for 2021 showing how much they received to help tax payers determine if they received the correct amounts and to reconcile any mistakes, but millions of discrepancies and math error notices remain likely.
The deadline to submit returns is April 18, 2022 for most taxpayers because April 15th, which falls on a Friday, is the Emancipation Day holiday in Washington, DC. Taxpayers in Maine and Massachusetts have until Tuesday, April 19th because of local holidays. The deadline for filers requesting an extension is October 17, 2022, but taxpayers who file for an extension still must pay any taxes owed since an extension only gets you extra time to file your return. If a taxpayer fails to pay estimated taxes, the IRS can assess a penalty up to 25% of the unpaid tax. To paraphrase a famous quote, apparently nothing is certain except death and delayed tax refunds.