April 15 is tax deadline day — and here’s why it’s also important for the stock market

Happy Tax Day to those who celebrate. Or don’t.

April 15 also happens to be an important calendar event for the stock market, say researchers at the institutional brokerage firm Strategas Securities who warn that a vital “liquidity boom” which has been supporting markets during the Iran conflict is about to ebb.

• Here’s who walked away with $32 billion in refunds from Trump’s tax cuts this tax season

• With the largest industrial IPO since 1999, this air-quality giant’s stock opens with a bang

This comes just as they see investors growing increasingly optimistic about a deal to end the Middle East war.

A team led by Daniel Clifton, head of policy research at Strategas, noted that financial markets have been getting a timely helping hand from around $700 billion in stimulus that’s been working its way through the system this year.

That stimulus includes tax refunds, 100% expensing of business investment, mortgage-backed-securities purchases and financial deregulation, by their accounting. But tax refunds are now shifting to tax payments.

Clifton and his team noted that taxpayers who are set to get a refund often file early, which leads to the Treasury making tax-refund payments for February and March and drawing down its Treasury General Account. Those who need to make tax payments tend to file around the April 15 deadline.

“We estimate that non-withheld tax payments will drain more than $500 billion (gross) from the banking system in the next three weeks,” they wrote. “The Fed has been expanding its balance sheet since December to build bank reserves in the system to absorb this temporary loss of reserves.”

The New York Fed said Monday that the central bank’s balance-sheet expansion will shift to a net $25 billion per month in Treasury bill purchases from $40 billion. The plan to slow that after tax payments finish wasn’t a big surprise, and the final purchase number was a bit better than markets expected. But it still marks a “step down in terms of liquidity,” the analysts noted.

“This is all manageable should policymakers directionally move to an Iran deal, but a re-escalation with less liquidity will be tougher to chew on for investors if no deal is reached,” they said.

Strategas said that, in recent chats with investors, most have mentioned how the S&P 500 SPX is now trading above where it stood before the Iran war. Investors appeared “emboldened” by the headlines, but the researchers are wary about market direction in light of a disruption to that big liquidity cushion.

For investors banking on an Iran deal to keep the market party going, Clifton and his team urge them to keep four questions in mind: