Taking Losses Can Be a Good Thing | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Stocks Bounce Back
Well, stocks have bounced off their October lows and are in rally mode again; up, down, up down. This is actually par for the course – it’s what markets do.
We have been stuck in the mud on the S&P 500 index for quite some time now, however. In fact, the broad market index is exactly where it was in July of 2021, nearly two-and-a-half years ago.
This time, the catalyst for the move higher was last week’s Fed meeting. I discussed how that could be a pivotal turning point for the market in the last episode of The Investors Edge.
Now that the rapid rise in interest rates seems to have abated, many investors think the biggest headwind for stocks has been removed from the equation.
Nevertheless, the signs that the economy is slowing as we approach 2024 are growing.
A recession may in fact still be on the horizon, which could be a reason to fear rather than cheer falling oil prices and interest rates. It could be a prelude to falling earnings estimates and stock prices.
Featured Insight: Taking Losses Can Be a Good Thing
This is the time of the year when many investors look for opportunities to harvest losses in their portfolios.
Many people look at losses as a bad thing, but selling a losing investment can make sense for many reasons.
First off, you don’t have to make your money back on the same investment that you lost it on, and there are no guarantees your losing investment will bounce back.
You can use a losing investment to offset gains from a winning investment for tax purposes, and even write off up to $3,000 in losses against your ordinary income.
Lastly, total return on your portfolio is what really matters. You have income from interest and dividends, realized and unrealized gains from other investments, and possibly income generated from options transactions if you engage in that type of activity.
It’s important to judge the overall total return from all sources when judging the results of your overall portfolio. That may help to realize that selling losers can be a good thing for your overall financial health.
Looking Ahead: Data in Focus
With earnings season largely behind us, the markets will be taking their cues from the economic data reported between now and the end of the year.
It’s hard to tell at this point whether or not the market prefers strong data or weak data. The best case scenario is Goldilocks – not too hot as to keep interest rates rising, but not so cold as to indicate the economy is dipping into a recession.
At the moment that appears to be what we’ve been getting, which is likely why the markets have bounced back in the past couple of weeks.
Next week will provide plenty more clues as to how things are evolving. We’ll get more inflation data, consumer spending numbers via retail sales, and the small business optimism index just to name a few.
We’ll also hear from multiple Fed governors to get more insight into whether the central bank is likely to shift gears or not.
Copyright 2023 The Business Journal, Youngstown, Ohio.