April is often a rough month for the stock market as Americans reach into their pockets-and their portfolios-to pay the taxman, but one analyst says that trend may be offset by higher-than-expected withholding rates, MarketWatch reported.
Mark Hulbert, the founder of Hulbert Financial Digest in Annandale, VA, has been tracking the advice of more than 160 financial newsletters since 1980. In his MarketWatch column, Hulbert quoted Madeline Schnapp, a senior research analyst at TrimTabs Investment Research and editor of two of that firm's newsletters, TrimTabs Personal Income and TrimTabs U.S. Employment Update.
Schnapp says her research has shown that taxpayers tend to be in denial about the looming tax deadline during the first quarter of the year and are often surprised by how much they owe on April 15. In most years, that means bad news for the stock market, but Schnapp says this is not most years.
Her research found that tax refunds are up by 6.7 percent, due in part to the failure of many to alter W-2 forms at the start of 2004 to reflect changes in the tax law. So many of the usual tax surprises are turning out to be pleasant surprises, Schnapp said, which means good news for stocks as well.
Schnapp has mined some other good news from available IRS data, noting that "withheld income and employment taxes have surged 8.5 percent year-over-year over the past four weeks. Since November 2004, growth in withholdings has averaged 7.4 percent year-over-year growth, which is well above the 5 percent year-over-year pace indicative of moderate economic and employment growth."
She said the Congressional Budget Office is drawing even better conclusions from the IRS than she is, reporting that "revenues in the current fiscal year are running 10 percent higher than last year."
Schnapp said there are only two reasons that withholdings are up over last year-either people are being paid more or there are more people working. Since she could only find some indication of higher pay, the second option is likely the culprit. That more people appear to be working conflicts with recently released data from the Bureau of Labor Statistics, which reported Friday on lower-than-expected job growth. That leads Schnapp to reason that the growth is occurring in medium and small firms, which are not on the BLS radar.