Will Santa Claus Come to Town? | Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review:  Fed Accelerates Taper

If you’ve been a regular viewer of The Investors Edge then you’ve obviously heard me discuss the anticipation of the Federal Reserve tapering its asset purchase program as well as the announcement of said tapering six weeks ago.

For those of you novice financial market watchers, the Fed’s asset purchase program is simply a way for them to ratchet up or down the amount of money in the banking system. This obviously has implications for all markets, and is certainly at least part of the reason the stock market has performed so well over the past 20 months.

It stands to reason then, that the reduction in monetary stimulus from the Fed would create some headwinds for the equity market. And indeed it has. The S&P 500 is essentially flat since the Fed first announced it was tapering its asset purchases – and with significantly higher volatility than we’ve experienced for a while.

To make matters worse, the Fed announced earlier this week that it would accelerate the pace of reduction in its bond buying program at twice the previous rate due to persistent inflationary pressures that the Fed is charged with keeping under control.

The question now becomes just how much of a tightening in financial conditions will be required to bring inflation to heel, and when the Fed is faced with the difficult decision of fighting inflation or rescuing the stock market, which will they choose?

Featured Insight:  Take Advantage of Tax Loss Harvesting

The good news is that you likely don’t have a lot of losses in your portfolio, but the end of the year is a good time to take advantage of any losses that you do have to help generate tax benefits.

If you have taken a lot of capital gains this year, it likely makes sense to try and offset some of those gains by selling losing positions to generate losses that will help reduce your tax bill next year.

Even if you haven’t taken a lot of gains, you can use losses to reduce your ordinary income by up to $3,000, and amounts in excess of that can be used to offset future gains with no limit and/or future income, again, at a limit of $3,000 per year.

You may be really hoping that that losing stock position rebounds, but it is important to keep in mind that you don’t have to make your money back on the same stock you lost it on. You can sell your shares in Coke at a loss and immediately buy Pepsi (or any other stock for that matter) with the proceeds, thereby locking in the loss for tax purposes while keeping your money invested for future growth. If you buy back the same stock within 30 days, however, the loss will be disallowed in what is referred to as a wash sale.

Looking Ahead:  Will Santa Claus Come to Town?

December is usually one of the stronger months of the year on average for the U.S. stock market.

The second half of the month tends to be especially favorable, and is affectionately referred to as the “Santa Claus Rally”

Since 1950, the last five trading days of December and the first two days of January have shown positive returns for the broad market S&P 500 index 76% of the time with an average return of 1.3%.

Despite the Fed’s recent actions, there is reason to believe that Santa will in fact come to town again this year. Investors have been positioning for more market downside recently, and the unwinding of those positions should be a positive catalyst heading into year-end. Or perhaps that’s just wishful thinking. We’ll just have to wait and see.

Copyright 2022 The Business Journal, Youngstown, Ohio.