Finally, there is an additional headwind which will be felt this quarter. Because of all the uncertainty over tax rates and the alternative minimum tax, we’re all likely to see a big delay in receiving tax refunds. In the first quarter of 2012, the IRS cut checks for over $200 billion to 75 million taxpayers, each check averaging about $2,800. On November 30th,the Chairman of the IRS oversight board warned the Senate finance Committee that more than 60 million tax payers would have to wait until late March or later to file their returns and receive a refund. This delay represents yet another hit to household cash flow for the start of the year.
Even though the fiscal cliff has been narrowly avoided (or at least delayed), consumers are likely to face a triple hit in early 2013: higher payroll tax on all workers, higher marginal rates on upper-income households, and a likely delay in the refund process. The likely outcome is that Q1 spending will be unusually weak, even by recent standards.
For investors, there are a several implications. They should have modest expectations for Q1 growth and assume rates will remain low for the first part of the year. US equities may continue to trail international markets, and consumer discretionary stocks – particularly retailers – remain vulnerable.
Russ Koesterich, CFA, is the BlackRock Global Chief Investment Strategist.