Cheap stocks and tax losses in USA
2022.12.09 11:11
Cheap stocks and tax losses in USA
Budrigannews.com – It’s possible that investors who sell underperforming U.S. stocks in order to secure tax benefits before the end of the year are adding to the recent pressure on stocks and planting the seeds of a January rebound in some markets.
Tax-loss harvesting, or investors selling assets with a loss in order to cancel out the income taxes they owe on realized gains elsewhere in their portfolios, may be a stronger than usual headwind to markets this year, with the down about 16% year-to-date and many individual stocks nursing even sharper losses.
However, after the selling period has ended, some investors are betting that some of those beaten-down stocks and possibly the market as a whole could recover in January.
“This is the first time investors are looking at double-digit declines in about 13 years, and we’ve never seen this level of tax-loss selling before,” stated Peter Essele, head of portfolio management for Commonwealth Financial Network, who oversees approximately $11 billion in assets. As people begin to reenter long-term assets, that could lead to a pretty strong first couple of months.”
Analysts at BofA Global Research noted in a research report that S&P 500 stocks that are down 10% or more for the year – making them likely targets for tax-loss selling – have historically outperformed the broader index by 8.2 percentage points between November and the end of January in years when the index fell more than 10%.
The company found that Meta Platforms Inc. (NASDAQ:), one of 159 out of 338 stocks in the S&P 500 that had a loss of 10% or more for the year, could rebound after tax selling. Pizza Domino’s (NYSE:) Home Depot Inc. (NYSE:), Inc. what’s more, Amazon.com Inc (NASDAQ:). For the month of December, shares of each company are down at least 1%, with Amazon suffering the largest decline, at roughly 8%.
CNBC heard on Wednesday from DoubleLine founder Jeffrey Gundlach that risk assets will probably rise in January once retail investors finish selling tax losses. “Buyers of stocks whose 2022 Tax Loss selling pressure will soon abate,” Evercore strategists wrote on November 30.
It would appear that investors have already begun disposing of underperforming shares. According to the company, private clients at BofA, for instance, sold nearly $1.4 billion worth of stocks in November in likely tax-motivated selling, up from approximately $800 million last year, and appear poised to continue selling at that rate this month.
More Inventories revised downwards in US-report
NASDAQ: Vanda Individual investors typically withdraw approximately $1 billion on net from the shares of single U.S. stocks during the final weeks of December and put their funds into ETFs that give exposure to broader markets, fueling so-called “Santa Claus rallies” at the end of the year, according to research that tracks the behavior of retail traders.
According to Emily Roland, co-chief investment strategist at John Hancock Investment Management, macroeconomic concerns such as monetary policy and concerns over a potential recession resulting from the Federal Reserve’s rapid interest rate hikes are likely to remain the primary drivers of stock movements in 2023, potentially dwarfing the impact of seasonal flows.
She stated, “We wouldn’t want to overplay that trend as we move into more difficult waters next year.”
