December retail positioning to be driven by tax strategies: Stephens

Investing.com — December is shaping up to be a pivotal month for retail investor repositioning, as year-end tax strategies are expected to play a significant role, according to a new note from Stephens.

On Tuesday, the firm highlighted the opportunity for retail investors to leverage tax loss harvesting amid a year marked by notable equity appreciation alongside performance dispersion, particularly in SMID-cap stocks.

Stephens notes that “26% of the 491 Russell 1000 and 45% of the 1,404 heavily retail-owned members” posted year-to-date losses, creating ample tax harvesting opportunities.

The firm explains that the strategy involves selling underperforming stocks to offset gains, with investors often reallocating funds into passive equity ETFs featuring similar characteristics.

Historical data supports this trend. Stephens says passive equity ETFs recorded consistent net inflows in each of the last eight Decembers, driven in part by tax harvesting strategies.

Meanwhile, the firm notes that heavily retail-owned laggards have shown strong December performance, outperforming in six of the last seven years. Stephens attributes this to “rotation into high-quality laggards,” with December outperformance ranging from 0.2% in 2017 to a notable 12% in 2013.

Conversely, heavily retail-owned gainers are said to have exhibited more varied December trends.

While they have outperformed in the last two years, the note cites “profit-taking and the impact of passive equity ETF flows” as factors influencing performance.

Stephens predicts that the biggest gainers with significant liquidity exposure to ETFs may benefit in December, while those without such exposure could lag due to retail profit-taking pressures.

The firm believes December positioning will likely center around both tax harvesting and the dynamics of passive equity ETF flows, providing potential opportunities for retail investors to optimize their portfolios into year-end.