We believe that seasonal tax-loss selling
is the reason for this.
Acree adds that the headwinds from tax-loss selling
and portfolio rebalancing should be largely in the past, and expects the constructive U.S.-China trade talks to bring back investors looking for "strong fundamentals".
Some of the outflows likely reflect year-end tax-loss selling
, ICI says, noting that about investors withdrew some $11 billion from stock funds and $12 billion from bond funds.
"We had a final run of tax-loss selling
and then dealers swooped in seeing it was an artificial sell-off," said Bill O'Neill, a partner in the commodities investment firm LOGIC Advisors.
The $600 billion of automatic tax increases and spending cuts scheduled for the beginning of next year includes higher rates for capital gains, making tax-loss selling
even more appealing than usual.
Based on the mixed results of prior research related to the January effect, weak evidence of tax-loss selling
, the inability of traditional measures of beta to explain realized returns, and the development of VaR as an alternative risk measure, we address the following research questions:
Another way to reduce taxes is to do some tax-loss selling
to offset any potential capital gains.
However, when participants become more sensitive to tax considerations, the results of the primary experiment support the tax-loss selling
Second, there is evidence of trading behavior that is consistent with year-end tax-loss selling
. In taxable accounts in December, and especially in the last week of December, investors are more likely to sell losers than winners.
Small cap stocks, tax-loss selling
, congressional elections, "Santa Claus," market expectations and self-fulfilling prophecies may be the cause of this phenomenon.
So, no guarantee, but with the market oversold on a technical basis, tax-loss selling
season coming to an end, unusual amounts of cash on the sideline as potential fuel, the end of the election uncertainty and anticipation of the Fed switching back to a friendly bias, the market is probably entering a period where its upside potential will be greater than its downside risk.
Because of the unique market conditions over the past few months, the logic seems even more compelling this year that decisions on tax-loss selling
should be made through the art of valuation rather than as a continuation of a seasonal practice.