Put simply, a viscous combination of tax loss harvesting and profit-taking in winning names ahead of a potentially higher capital gains tax rate could put overwhelming pressure on U.S. stocks just one more time this year.
This year saw a 34% bear market induced by the coronavirus recession, a second bear market for oil and banks in June and a tech-driven 9% down-move on the S&P 500 in September.
Hang onto the roof, investors.
Tax loss harvesting could be pronounced at year end and the tax headwinds do not stop there. For the winners in this market — and there have been some big ones — investors may aggressively take some chips off the table if former Vice President Joe Biden is elected President. He would attempt to raise the capital gains tax for those earning more than $1 million a year from 20% to 37%.
There are some caveats to all of this.
Although the S&P 500 has gained more than 5% year-to-date, it has been a bifurcated market, with many stocks down for the year. Tech stocks account for about 30% of the market cap of the index and have risen fiercely, with the Nasdaq 100 up more than 30%. That’s on the back of several tailwinds, the stay-at-home environment among the strongest. But a large portion of stocks on the index are down for the year. Investors may be compelled to sell.
Strategists at Morgan Stanley see 73 U.S. stocks poised for technical pressure because of tax loss harvesting. Among them are Disney (DIS) – Get Report, down 15% year to date, General Motors (GM) – Get Report, down 11%, Cigna (CI) – Get Report, down 13% and Hasbro (HAS) – Get Report,