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Here is our Club Mailbag email investingclubmailbag@cnbc.com; so you can send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. Here’s a quick mailbag comment that answers nine member questions. At the end of the year, we start hearing about the Santa Claus rally and tax loss collection. Can you explain what they mean and what an individual investor should keep in mind? Thank you! Reneta Very timely mail bag. The so-called Santa Claus rally refers to a seasonal pattern that occurs during the last five trading days of the year and the first two of the new year. During this seven-day period, the S&P 500 has historically risen -1.3% on average since 1969, according to the Stock Trader’s Almanac. This time, the Santa Claus window covers December 24, then December 26-31, and then January 2-3. The fair is closed on December 25th and January 1st for the holidays. Seasonal patterns are not always rational, and their causes are sometimes difficult to determine. However, if we think about what happens before and after the Santa Claus rally, we understand why it might happen. To that end, let’s start by addressing the second part of the question: tax loss harvesting. This is the practice of selling underwater positions in a portfolio to realize losses and offset gains elsewhere, with the ultimate goal of reducing one’s tax burden for the year. Tax-loss harvesting can happen at any time of the year, but the focus is usually on December because it’s the last chance to lock in a portfolio’s gains and losses before the end of the year. For the same reason – the effort to minimize the profits made – we can see that investors want to hold on to winners so close to the end of the year. The thinking is, if you push the sale into the next year, you can also take out the tax liability for another year. Put the two together, and we have a dynamic in December where investors see an incentive to sell losers and hang on to winners. As we approach the end of the year, the amount of tax loss harvesting tends to ease as investors get their sales in before holiday trading volumes drop, which may help explain the existence of the Santa Claus rally. Basically, as the selling pressure from year-to-date losers subsides, those stocks become less of a drag on the S&P 500. Meanwhile, investors are no longer willing to part with their winners, allowing these stocks to soar. lack of sellers Understanding the Santa Claus rally also requires us to consider what’s known as the January effect, another seasonal trend that sees stocks rally to start the new year. Moreover, it is not always clear why this happens. However, one reason could be to buy back the sold names to collect tax losses. Here we see another reason to say that tax collection can be done better in early December: the cleaning rule. The washout rule basically says that investors must wait 30 days to repurchase a security that was sold for a loss, otherwise you won’t be able to realize those losses on your tax return. After the 30 days are up, however, investors can buy the securities they just sold; after all, these battered stocks of the previous year will come mid-January to start offering an interesting opportunity for a comeback in the new year. . Main takeaway? The seasonal effects seen during the Santa Claus rally period may be the result of easing tax loss harvesting, investors sticking with winners to defer the tax burden, and low holiday volume as investors take a break from screens. On the other hand, the January effect may be the result of investors piling on the stocks they sold for tax purposes because they believe that—after 30 days—there is still upside to be found. The January effect may also contribute to the Santa Claus rally. If investors believe in the January effect and want to position themselves for an overall strong month, then they need to get in early – an additional factor that may explain the historic strength of the seven-session Santa Claus rally window. It’s important to note: marketers aren’t necessarily concerned with why the season happens. Their concern is simply the existence of the historical model, which can guide their decisions. So what does this all mean for the individual investor? Well, if you’re trying to trade, you now have a sense of the dynamics at play, which should improve your understanding of the action. However, if you’re a long-term investor, as we are at the Club, it shouldn’t affect your allocation or strategy too much, so expect late November to early December to be a good time for your review. portfolio to identify opportunities to reduce your tax burden. Monitoring seasonal patterns is helpful, but should generally not be the basis of long-term investment decisions. Sure, while we kept it high-level and simple in this answer, taxes are complicated. Holding periods are important when determining the tax rate associated with gains and losses, as well as your personal financial situation. In this case, we are talking about taxes in the context of an investment portfolio, but all sources of income will be taken into account at tax time, as well as any tax credits earned, such as those from the purchase of an electric vehicle. home solar installations. That’s why it’s important to understand all of the personal dynamics at play, and it can be helpful to speak with a tax advisor as you consider your tax collection moves. (See a full list of Jim Cramer’s Charitable Trust stocks here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim trades. Jim will wait 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS PURSUANT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, SUBJECT TO OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR OBLIGATION IS CREATED, OR CREATED, FOR ANY INFORMATION ENTERED INTO WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
A person dressed as Santa Claus greets guests before participating in the opening bell ceremony to celebrate the Macy’s Thanksgiving Day Parade at the New York Stock Exchange (NYSE) on November 22, 2023.
Brendan McDermid | Reuters
Here is our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. Here’s a rapid-fire commentary that answers nine member questions.
At the end of the year, we start hearing about the Santa Claus rally and tax loss collection. Can you explain what they mean and what an individual investor should keep in mind? Thank you! Reneta
