Many investors have likely heard of various seasonal techniques to employ with regards to stocks. A common one is the Santa Claus Rally. This involves the perception that stocks do well between Thanksgiving and year end, though some market historians just consider the last week of the year.
There was a recent report that examined this phenomenon, and it is partially true. In essence looking back throughout history the period between Thanksgiving and Christmas resulted in returns typical to the rest of the year. However, the period after Christmas and extending into the first two days of January resulted in stronger performance.
In theory it shouldn’t make much difference how stocks perform based on the time of the year. In a truly efficient market certain seasonal tendencies are factored into a company’s performance, and would be difficult to exploit. However, this is one anomaly that has tended to persist.
A major reason that stocks do better the last week of the year is that this is vacation time for much of corporate America. Companies typically do not report news events during this time, so there are less negative reports occurring compared to a typical quarter end. Furthermore, many investors both personal and institutional have sold their poorer performing stocks prior to this time.
There are several factors that tend to help stocks in early January. The start of a new year tends to bring some optimism, as the slate is wiped clean from the prior year. Also, some individuals have received year-end bonuses, which are often are redeployed into the stock market.
Since 1950 the stock market has rallied on average 1.5 percent for the last five trading days of the year, and the first two days of January. The key words to note are on average, as this rally does not occur every year. For many small investors the trading costs could approach what the potential gains might be. In addition, the gains in the future may not be as significant, as they have been in the past.
For most people the end of the year should be a time to review your asset allocation, along with your overall tax situation. The last two years have been good for the stock market, so for some their percentage holdings in stocks may have increased beyond their target level.
Generally most people would want to take losses in their personal account, to offset gains. The exception being, if you already have losses in excess of $3,000, which is the most you can take in a given year. In addition you would not want to take a tax loss this year, if you expect to be in a significantly higher tax bracket next year.
Likewise with gains, if there is a stock in your personal account that you are thinking of trimming or selling, it would generally be best to wait till the next year. It is best to defer paying taxes, if you have the opportunity. However, if you expect to be in a higher tax bracket next year, then taking the gains this year would be preferable.
The timing of gains and losses applies only to personal accounts. Selling stocks or a mutual fund in and IRA or 401K account is not a taxable event. Therefore, you would not need to concern yourself with year-end tax planning for those accounts.
In general for most investors I would not recommend trying to exploit short term trading strategies. This would generally be best left to skilled traders.
If you are planning on selling a stock this year, history would suggest waiting right till the end of the year to get the best price. Even then there is no guarantee that it will be beneficial, and the likely gain would probably be small versus selling now.
Likewise for buying a stock, history would suggest making a purchase now versus next year. Of course that is assuming the stock market continues to perform reasonably well.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.