After a tumultuous October and November, investors have thus far not received any pre-holiday cheer in December.
December is usually when Santa comes to Bay Street and Wall Street. A “Santa Claus Rally” is defined as a market upswing occurring in the last week of December through the first two trading days in January. Historically, since 1969, this has occurred roughly 75% of the time.
At the end of the day, investors need to understand that Santa Claus Rallies are a short term event that is typically done with low volume trading. It’s something we can’t hang our hat on.
Unfortunately, we believe investors should be prepared for potentially more selling in December.
Remember - many investors had realized profits throughout 2018. This year has been marked with two major drops in the Technology sector (first in February/March, the second starting in October and is still going on). These technology stocks have large unrealized gains that have built up over the last five years and many investors have opted to take some of those profits, thereby generating taxable capital gains. Typically, they do try to offset some of those capital gains in October and November by realizing losses from their portfolio. However at the end of the day, investors are comfortable paying some tax when they have made money that year.
Unfortunately, the steepness of this most recent ‘bear market’ has caused many mutual funds and investors to now have a negative return for the year. Reporting a negative return and having to pay capital gains tax feels like kicking someone when they are down. Simultaneously, this recent bear market has created new losing positions in portfolios. Hence, we would not be surprised if a continued wave of selling comes from a second wave of tax loss selling. Investors will be motivated to sell these losing positions so that they don’t have to pay those remaining capital gains.
Regardless of how this year ends, we should remind ourselves that a new year is coming. Often, how investors feel on December 31st can be completely different on January 1st. While still in December, investors focus on what has happened during that year, but once in January, investors focus on what’s to come in the year ahead. A new year often reminds investors to leave the past to the history books and refocus on the fundamentals of the economy and corporate earnings. At these levels and fundamentals, 2019 may potentially bring some value-investors back to the market.