Get Ready for Tax-Loss Selling and the ‘Santa Rally’: How They Could Impact U.S. Stocks Post November Surge

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Amidst a tumultuous year for U.S. stocks, investors are keeping a keen eye on various market influencers heading into 2023’s final weeks. Potential market trends such as tax loss selling and the Santa Claus rally are on the radar of wary investors.

It seems that the major catalyst will continue to be driven by the anticipated path of the Federal Reserve’s monetary policy. As market participants gauge the likelihood of rate cuts beginning as early as the first half of 2024 due to a slowdown in economic growth, they’re emboldened by the current market rally that has boosted the S&P 500 (.SPX) to a year-to-date 19.6% gain, achieving a new high for the year on Friday.

This year, seasonal trends have remained particularly robust, with September and October experiencing significant market fluctuations. However, the S&P 500 outperformed historical norms with a nearly 9% increase in November. Despite a strong showing in 2023, December tends to exhibit its unique market dynamics, diverging from typical trends observed throughout the year. Chief investment strategist at CFRA Research in New York, Sam Stovall, explained that historical trends reveal how December can sometimes stray from the norm.

Looking ahead, market players are eagerly anticipating U.S. employment data to be released on December 8, to get a clear view of the current economic trajectory.

With an overall positive historical average gain of 1.54% since 1945, December remains the second-best month for the S&P 500. There’s also a high likelihood for a market gain as the index has risen 77% of the time, according to data from CFRA. Based on LPL Financial’s research, the latter half of December typically outshines the first part, with Santa Claus rallies driving the S&P 500 to an average 1.4% gain, as opposed to 0.1% in the first half, according to market data analyzed dating back to 1950.

While December marks a strong season for stocks, it presents certain challenges as well. Businesses that have struggled this year might come under additional selling pressure due to tax loss selling practices. However, history suggests that these underperforming stocks may experience a rebound later in December and into January as investors turn their attention to undervalued assets. According to BofA Global Research, stocks that were previously down 10% or more between January and the end of October outpaced the S&P 500 by an average of 1.9% in the next three months.

Despite the substantial rise in the market this year, investment portfolios are likely to have their share of underperforming stocks. Approximately 72% of the S&P 500’s rise is attributed to a cluster of megacap stocks such as Apple, Tesla, and Nvidia, while the equal-weighted S&P 500 has seen a 6% gain in 2023, devoid of the influence of tech and growth stocks.

Over-exuberance in the market is also a growing concern, especially after November’s significant rally. Certain speculative investments, represented by companies such as Roku and Coinbase Global, experienced huge gains. To this effect, Michael Hartnett, chief investment strategist at BofA Global Research, indicated that BofA’s Bull & Bear indicator had reached an inflection point by moving beyond the “buy” zone.

Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang

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