As we go through the holiday season, the end of the calendar year serves as a nice point of inflection for what we’ve accomplished over the last twelve months. At MONTAG, we think about the seasons too, as history has shown us that stock markets can have seasonal trends, none more apparent than the end-of-year trend.
If the stock market has been nice, there is probably something in your stocking at the end of the year, in the form of appreciated stocks (i.e., capital gains). Or if the stock market has been naughty, well, that lump of coal down there is probably some stocks with a capital loss. Most likely, though, an investor may have some combination of the two, as rarely does a portfolio have ALL winners or ALL losers at the same time.
Given some mix of capital gains and losses in the portfolio, it might be prudent to take some of those gains off the table. Similarly, it might be prudent to sell some losers to net your loss against that gain. And this leads us to a seasonal phenomenon known as The January Effect.
Simply put, whether you are selling to protect gains or selling to take some losses (which helps with your taxes), that’s a lot of selling no matter what, and typically with a lot of people doing this at the same time (December, that is), the stock market tends to drift lower as the selloff tends to depress stock prices. Therefore, The January Effect is the hypothesis that stock prices increase the first week in January (the hypothesis points to January 5th being the end of this phenomenon) as buyers reenter the market and bid back up stock prices.
At MONTAG, we are stewards of your hard-earned wealth, and tax planning like we’ve described above is an important part of the portfolio manager assignment. These decisions are certainly made in a thoughtful and prudent manner and not something we would do to time the market. To take it one step further, we would definitely not engage in the reverse either; that is, trying to buy the “hot” stocks at the end of the year to show clients we had the biggest winners of the year.
So sit back, relax, and enjoy the holiday season. Maybe do a little shopping…the retail stocks wouldn’t mind a bit.