Wall Street week ahead Tax-loss selling, ‘Christmas rally’ could impact US stocks after November meltdown

New York Stock Exchange (NYSE) building after the start of the trading session on Thursday in New York

The back of the “Fearless Girl” statue is pictured as morning sunlight falls on the facade of the New York Stock Exchange (NYSE) building after the start of Thursday’s trading session in Manhattan in New York City, New York, USA, on March 28 January , 2021. Portal/Mike Segar/File Photo Acquire License Rights

NEW YORK, Dec 1 (Portal) – As U.S. stocks post big gains at the end of a rollercoaster year, investors are paying attention to factors that could affect stocks in the remaining weeks of 2023, including tax-loss selling and the so-called Santa Claus rally.

The most important catalyst for stocks will likely continue to be the expected development of the Federal Reserve’s monetary policy. Evidence of a slowdown in economic growth has led to bets that the Federal Reserve could begin cutting interest rates as early as the first half of 2024, sparking a rally that has lifted the S&P 500 (.SPX) 19.6% since the start of the year and the index rose to a new year-end high on Friday.

At the same time, seasonal trends were particularly strong this year. In September, the historically weakest month for stocks, the S&P 500 fell nearly 5%. Stocks fluctuated wildly in October, a month known for its volatility. The S&P 500 gained nearly 9% in November, a historically strong month for the index.

“We had a solid year, but history shows that sometimes December can take its own course,” said Sam Stovall, chief investment strategist at CFRA Research in New York.

Investors will be watching next week’s U.S. employment data, scheduled for release on December 8, to see whether economic growth weakens further.

Overall, December was the second-best month for the S&P 500, according to CFRA, with the index rising an average of 1.54% since 1945. It is also the month most likely to see an increase, as the index rose 77% of the time, according to the company’s data.

Research from LPL Financial has shown that the second half of December tends to dwarf the first part of the month. According to LPL’s analysis of market movements since 1950, the S&P 500 gained an average of 1.4% in so-called Santa Claus rallies in the second half of December, compared with a gain of 0.1% in the first half of the year.

However, underperforming stocks could come under additional pressure in December from tax-loss selling as investors dump losers to take write-downs before the end of the year. Analysts say some of these stocks could rally later in the month and into January as history returns to undervalued names.

According to BofA Global Research, since 1986, stocks that fell 10% or more between January and the end of October outperformed the S&P 500 by an average of 1.9% over the next three months. PayPal Holdings, CVS Health and Kraft Heinz Co are among the stocks the bank recommends buying for a tax-related boost, BofA noted in a report in late October.

“The market rise has been extraordinarily small this year and there is reason to believe that some sectors and stocks will have a really tough time until they see some relief in January,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute .

Despite the market’s strong rise since the start of the year, investment portfolios are likely to contain many stocks that are underperforming. Nearly 72% of the S&P 500’s rise was driven by a group of mega-cap stocks such as Apple, Tesla and Nvidia that have outsized weights in the index, data from S&P Dow Jones Indices showed.

Many other names have slipped: The equal-weighted S&P 500, whose performance is not distorted by big tech and growth stocks, is up about 6% in 2023.

Some fear that excessive exuberance may already have set in among investors following November’s big rally, which saw huge price moves in some of the market’s more speculative names.

For example, streaming service Roku rose 75% in November, while cryptocurrency company Coinbase Global gained 62% and Cathie Wood’s ARK Innovation Fund gained 31%, the best performance of any month in the last five years.

Michael Hartnett, chief investment strategist at BofA Global Research, said in a note Friday that the firm’s contrarian Bull & Bear indicator – which assesses factors such as hedge fund positioning, equity flows and bond flows – has moved out of the “buy” zone first time since mid-October.

“If you caught it, you don’t need to chase it,” he wrote of the rally.

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

Our standards: The Trust Principles.

Acquire license rights, opens new tab