Tax-loss selling to pressure 2017's losers in December
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[December 09, 2017]
By Chuck Mikolajczak
NEW YORK (Reuters) - Stocks that have been
lackluster so far in 2017 are unlikely to see their fortunes reversed in
the final month of the year, as investors engage in tax-harvesting
practices before the new year.
Investors often exercise tax-loss selling strategies, dumping stocks
that have performed poorly in order to reduce or eliminate capital gains
taxes, as the year draws to a close.
"This is something we do every December, we take losses for clients who
we’ve created gains for," said Jake Dollarhide, chief executive officer
of Longbow Asset Management in Tulsa, Oklahoma.
"Your clients want their cake and they want to eat it too - so they want
to see an 8 to 12 percent return in any given year and they’d like to
also not have to pay capital gains taxes."
Tax overhaul negotiations in Washington have also added a potential
wrinkle this year, as investors may wait until a clearer picture
emerges. An investor seeking to divest a stock from their portfolio may
hold off until January to delay paying taxes until the following year.
"There are a lot of people waiting on tax reform to make those
decisions," said Ken Polcari, director of the NYSE floor division at
O’Neil Securities in New York.
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Stocks that were among the worst performing on the benchmark S&P 500
index in 2016 saw losses mount in the final month of that year.
TripAdvisor <TRIP.O> fell 4 percent in December before closing the year
with a loss of nearly 46 percent. Vertex Pharmaceuticals <VRTX.O>
dropped nearly 10 percent for the month to close out the year with a
decline of 41.5 percent.
That selling has often led to what is referred to by market participants
as the "January effect," when stocks, particularly smallcap names, that
may have been sold in December for tax harvesting, experience a rebound
the following month.
Investors are prevented from selling shares for tax harvesting purposes
and buying them, or shares in a similar stock, within 30 days by an
Internal Revenue Service regulation against what is known as a "wash
sale." That wait period helps create a lag before the beaten-down stocks
rebound.
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A street sign for Wall Street is seen outside the New York Stock
Exchange (NYSE) in New York City, U.S., December 28, 2016.
REUTERS/Andrew Kelly/File Photo
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BUYING OPPORTUNITIES
However, identifying stocks that may be potential buying opportunities because
of tax harvesting strategies has become more difficult.
Many mutual funds share a fiscal year-end date at the conclusion of October and
may start to sell for tax purposes in September. In addition, investors have
become attuned to the practice and no longer limit the selling to December.
"Tax loss selling is like holiday shopping, it happens earlier and earlier every
year," said Nicholas Colas, co-founder at DataTrek Research in New York.
At the start of 2017, TripAdvisor bounced back with a 14.1 percent rally for
January, and Vertex surged 16.6 percent compared with the 1.8 percent S&P 500
<.SPX> gain for the month.
Among smallcap names, Mirati Therapeutics <MRTX.O> tumbled 11.2 percent in
December 2016 en route to a drop of about 85 percent for the year. The stock
rebounded sharply at the start of 2017, with a jump of over 7 percent in
January.
Among the worst performers for the year on the S&P 500, Under Armour <UAA.N> and
Range Resources <RRC.N> have slumped more than 50 percent, while Signet Jewelers
<SIG.N> and General Electric <GE.N> have lost more than 40 percent. On a sector
basis, energy has struggled across the market cap spectrum for the year.
Further complicating matters this year was the strong performance registered by
equities in September and October.
While those two months are historically a difficult time for the stock market,
the S&P 500 rose roughly 2 percent in September and October, while the smallcap
Russell 2000 index <.RUT> jumped 6 percent in September and tacked on another
0.8 percent in October.
"This year, we had pretty good performance in September and October," said Steve
DeSanctis, equity strategist at Jefferies in New York. "Now it is up to other
things like tax that is going to be more of a driver."
(Editing by Bernadette Baum)
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