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Stocks Face End-of-the-Year Selling
With the Thanksgiving holiday in the market’s rearview mirror, the 2022 holiday season is now in full swing.
The next significant event for markets will be the December 4 OPEC meeting, where the oil ministers will decide on production policy for the first half of 2023. US energy policy, the war in Ukraine, and other factors have increased petroleum prices and handed the pricing power back to the international cartel and its most influential member, Russia.
The Fed meeting and November inflation data will be the driving force for interest rates. The US central bank will decide if it will increase the short-term Fed Funds Rate by 75 basis points for the fifth consecutive time or if it will opt for a 50-basis point increase that reflects the slightly lower-than-expected October consumer and producer price index data. In either case, the Fed Funds Rate, which was at zero percent in March 2022, will be above the 4% level at the end of 2022.
Markets reflect the geopolitical and economic landscapes. The war in Ukraine continues delivering tragic news, and US relations with China and Russia are strained. However, with the leading stock market indices lower since the end of 2021, the most potent force on stocks could be the end-of-the-year tax loss selling that is bound to hit the equities sector over the coming weeks.
Tax planning is critical for investors
- Gridlock in Washington, DC, likely precludes the odds of tax increases, but planning for 2022 returns is now underway.
- In bullish years investors tend to trim portfolios balancing winners and losers to minimize tax liabilities.
- In bearish years, tax-loss carry forward can minimize liabilities in the coming years.
- Accountants and FAs will be very busy over the coming weeks. Assisting clients with 2022 taxes is at the center of the stage.
Losses could compound as investors throw in the towel to prepare for their 2022 returns
- 2022 has been a frustrating year for stock investors, with all the leading indices posting significant declines.
- Some investors and funds will look to clear the decks and sell underperforming assets to start 2023 with a clean slate.
- Sellers will likely part with their losers before the end of the year; selling can begin in early December.
Liquidity has been problematic- Illiquidity increases volatility
- Liquidity has been scarce over the past weeks as investors and traders have limited risk positions, with some moving to the sidelines.
- Liquidity is critical for markets to operate smoothly without price spikes on the ups and downsides.
- Volatility tends to increase during illiquid periods.
Downside spikes could be buying opportunities- Be selective
- An overabundance of tax-loss-selling could exacerbate price variance in December.
- Sudden downside spikes increase fear and could present investors with buying opportunities.
- Companies with earnings and strong management could suffer but are the optimal candidates for investments during market selloffs.
- Avoid the most speculative companies that do not have a solid earnings history, as they tend to suffer the most during overall market corrections.
Four potential bullish factors for stocks in 2023
- An end to the war in Ukraine will likely cause optimism and buying to return to the stock market.
- Falling energy and food prices will take the pressure off supply-side inflation, lifting stocks.
- A Fed pivot to a more dovish monetary policy approach would be a bullish signal for stocks.
- Improving relations between Washington and Beijing would reduce worldwide tensions, creating optimism and lifting stocks.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!