Tax Rascal

No Santa Claus Rally This Year

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No Santa Claus Rally This Year

Investors have long known that December and January are among the best months for stocks. Most investors know why, too: late in the year, it’s possible to sell losing stocks in order to shelter profits from the rest of the year. For example, if you’ve lost $1000 on GE, and made $1000 on IBM, you can sell both, take both losses—and pay not capital gains taxes on your profit.

Because of this, it makes sense to sell at the end of the year. (The IRS will let you buy the stocks back after 30 days and still give you the tax penalty.) And if people are selling stocks they still like, they’re going to buy them back later. All this trading gets other traders excited; it’s fun to try to guess which hammered stocks will be sold for the tax loss—and then to chase them back up when their owners buy them back.

This year, the S&P 500 was up 3% during December. But if you’re expecting Santa to swing by again in January, you might be in for some disappointment.

Compared to previous years, this stock market is a lot less interesting. In the late 90’s, you could pick tech stocks or huge momentum plays that paid off. In 2000-2003, tech stocks deflated, but value stocks roared back. Later on, asset plays and natural resource stocks dominated the market, while other companies lagged.

But in 2008, nearly everything went down—the only question was how “financial” the company was, and thus how far it fell. In 2009, everything went up—and this time, the game was Six Degrees of Ben Bernanke: big banks did great, companies that could borrow from them did well, and the rest of the market tagged along.

But that’s not all. Trading has also gotten choppier: algorithmic trading companies have started shuffling shares back and forth at a faster and faster rate, increasing volume and decreasing holding times.

All this means that there are far fewer stocks available for tax-loss sales this year. The last month’s rally might, in retrospect, look a little over-eager: if nobody is around to sell for tax losses, everyone who buys is buying in order to sell to a buyer who won’t show up. It’s a smaller version of the Greater Fool theory, but this weird tax quirk could cost investors money.

A Santa Clause Rally this year? What do you think?


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