Gill Capital Partners Early-October 2021 Update
Fall is here, and with it has come cool mornings, fall colors, and a cooler market sentiment. COVID-19 headlines have taken a bit of a backseat to political and economic headlines such as the debt ceiling, infrastructure, inflation and tax changes. The market just had its first negative month of the year amidst a barrage of political and economic headlines that seem to have finally worn investors down a bit. We will get into these issues and provide our views on them, but first, a bit of humor.
Debt Ceiling
Congress is attempting to reach a deal to raise the federal borrowing limit, or “debt ceiling,” before the government runs out of money to pay its bills. Treasury Secretary Janet Yellen recently said that the Treasury will be unable to pay all of the government’s bills if the ceiling isn’t raised by approximately October 18th.
What happens if the debt limit isn’t raised? If the government can no longer borrow to pay its bills, it may have to stop certain pension payments, potentially withhold pay for soldiers and federal workers, and/or delay interest payments.
How does the debt ceiling relate to a government shutdown? These are actually two different issues. A government shutdown occurs when congress hasn’t appropriated funds to pay to keep the government open, typically leading to temporary furloughs for some government workers until a new spending bill is passed. The last government shutdown was in December of 2018 and lasted for 35 days.
Senate Republicans blocked a democratic bill that would both fund the government and raise the debt ceiling. In response, Senate Democrats are seeking to pass a stopgap measure that funds the government through December 3, 2021 and suspends the debt limit through December 16, 2022.
Our view – Ho Hum…. This happens pretty much every year. Yes, there might be a temporary shutdown, but more likely than not an agreement will be reached. We find it almost comical that the headline seems to resurface every year and create so much angst. Congress always finds a way to fund the government and lift the debt ceiling at the last minute, and we suspect this time will be no different.
Infrastructure
What is the status of the much talked about infrastructure bill and associated tax law changes? Votes have been delayed in Congress as negotiations continue on President Biden’s social welfare priorities. Speaker Nancy Pelosi is struggling to piece together enough votes within her own party as progressive democrats have threatened to vote against the bill unless it is part of a much larger package. Further, not all Democrats are on board with many of the bill’s provisions that would lead to tax increases.
Our view – Both sides are strongly motivated to put together a sweeping infrastructure package, so we suspect this will happen. It is more a question of size and which levers are pulled to pay for it. The next few weeks will be key. Markets will certainly view passage of an infrastructure spending bill positively. We will provide more clarity as details on any potential tax law changes are released.
Market Updates
The S&P 500 snapped a seven-month winning streak last month and posted a negative return for the month, down 1.19% amid ongoing COVID-19 concerns, heightened inflation fears and budget wrangling in Washington. Interest rates also shot higher at the end of September, pushing bond returns further into negative territory for the year as the bond market continues to digest the prospect of the Federal Reserve tapering its purchases.
Our view – Stock markets, while down in September, were only off their recent highs by about 5%, and most equity markets are still heavily in positive territory for the year. The market has moved methodically higher all year with very little downside, so a correction should not be surprising here and may actually be healthy for the markets. We remain skeptical that rates will move significantly higher, as the Federal Reserve remains squarely in the corner of the markets. Furthermore, low global interest rates have and will continue to put a relative cap on U.S. interest rates that look rich relative to negative interest rates in many developed regions.
IRS Processing Delays
We have head from many that the IRS is heavily delayed with respect to processing tax returns this year, which has resulted in significant delays for refunds.
The IRS is open and processing mail, tax returns, payments, refunds, and correspondence. However, COVID-19 continues to cause delays in some of their services. Service delays include:
Live phone support
Processing tax returns, regardless of paper or electronic filing
Answering mail from taxpayers
Processing tax refunds
As of September 4, 2021, the IRS had 8.5 million unprocessed individual returns. Unprocessed individual returns include tax year 2020 returns with errors and those returns requiring special handling, such as a correction to the Recovery Rebate Credit amount or validation of 2019 income used to figure the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). All paper and electronic individual returns received by the IRS prior to April 2021 have been processed if they had no errors and did not require further review.
The IRS is opening mail within normal timeframes and returns that have errors or need additional review do not necessarily require them to correspond with taxpayers, but do require special handling by an IRS employee. In these instances, it is taking the IRS more than 21 days to issue any related refunds, and in some cases even 90 to 120 days. The IRS is having to correct significantly more errors on tax returns than in previous years.
In most instances, no further action is needed, but taxpayers may check Where’s my refund? for their refund status, or review Tax Season Refund Frequently Asked Questions.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.