In a previous article, It's Just Fiscal, we pointed out the important effect that federal government budget balances have on the stock market at certain times during the calendar year. In this piece, we outline how fiscal flows driven by tax-remittances in the month of April are coinciding with historical technical patterns to produce a pullback in stocks over the next couple of weeks.
Federal Government Budget Balances
So far this month, up to and including April 26, 2019, federal tax collecting has removed $346 Billion from the US economy. That money is no longer in existence and, therefore, cannot be used for investments (yellow highlight in table below).
The chart below shows the federal budget surplus (taxing more out of the economy than putting back) in blue, and the deficit (putting in more than is taxed out) in yellow. The red marks indicate the yearly April budget surpluses that result from federal tax remittances.
The next chart superimposes the S&P 500 onto the government budget profile for the same time period. Notice that each April, or early May, the SPX pulls back (red pointers on chart) before continuing to rally through the Spring and Summer (green dashed arrows) as the government’s discretionary spending is implemented and tax refunds are sent out.
We expect a similar short-term pullback to materialize in the next week or two, after which, the market should climb through new highs until September. This time around, the discretionary spending will include $2 Trillion for infrastructure which could make this the biggest up-leg of all.
(Fellow contributor at Seeking Alpha, Alan Longbon, does a truly superb job of explaining the economic fundamentals of how macro fiscal funds operate, and we highly recommend his article on the subject.)
Coincident Technical Patterns
It so happens that this tax season coincides with the stock market breaking out of a trading-range or "step." This is the third such step since the start of the bull market in 2009, and in the previous two breakouts, the SPX had pullbacks before continuing to the next up-leg of the bull market (red ovals on chart below).
The probability of a pullback in the next little while is significantly increased because of the coincidence of the technical breakout pattern and the tax-induced fiscal flows. This would provide a "buy-the-dip" opportunity ahead of what could be (thanks to the $2 Trillion infrastructure budget) the biggest rally of this bull market so far.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.