the January effect

Mutual funds and ETFs typically have an operating year that ends on Halloween.  They do their year-end tax selling in September and October.

Other taxable investors, like insurance companies and you and me, have tax years that end on New Years Eve.  So  we all do our year-end tax selling in December.  We sell stocks we have losses in.

Smaller-cap, low share price, limited liquidity speculative stocks, which are mostly the domain of retail investors, are particularly hard hit during December.  Part of this is the volume of selling; part is marketmakers who are loathe to take on inventory and who can sense anxious sellers, dramatically lower their offers.

what it is

Just as there’s most often a November stock market rebound from mutual fund/ETF selling, there’s also typically a January rebound from December tax selling.  This is the January effect.

It has two parts:

–the losers from the prior December rebound.  Again, this is partly that new buyers appear, attracted by now-lower prices, partly that marketmakers respond by raising their bids.  Low share price speculative stocks normally lead the parade.

–investors of all stripes tend to defer sales of stocks where they have gains until the new calendar year rolls around.  This is also income tax-related.  If for no other reason than some investors want to trim the size of their winning positions, the prior year’s big gainers typically open the year poorly.

how long it lasts

The January effect usually lasts about two weeks;  some years, however, it goes on for most of the month.

this January?

This January my guess is that energy stocks, which have sold off heavily throughout 2015, will show at least a temporary rebound.  My worry about them, other than that current financials aren’t yet available, is that the seasonal low point for demand is still ahead of us.  That’s normally in late January-early February.

It may also be that the stars of 2015, like Amazon and Netflix, will take a step backward.

It will be interesting to observe how the new month starts out.

entering 2016…

Three thoughts:

–taxable investors sell losers in December, winners in January

This has something to do with strategy, as investors reshape their portfolios for the new year.  But it’s more about recognizing losses to count against this year’s income while nursing gains into the new year for sale so income tax on them is delayed.

As a result of tax-selling distortions, the first couple of weeks in January march to their own drummer.  Losers beaten down by tax selling rebound (more about this and the “January effect” in a few days); last year’s winners swoon for a short time.

Early January often presents an opportunity to buy interesting stocks a bit cheaper than otherwise.

–dividend stocks

If I’m correct that 2016 will be another so-so year for stocks–let’s say up 5% or so–then stocks with an above-average dividend yield should remain attractive.  Since they’re typically mature firms with more reliable income streams, they also provide some downside protection.

The current dividend yield on the S&P 500 is 2.04%.  I think anything 50 basis points or more above that is worth a second look.  This is one reason I’m holding on to Intel (-2.3% ytd in 2015) and Microsoft (+21.7%).

–sector rotation?

The year to date returns on the S&P sectors are something like this:

Consumer discretionary     +10.5%

Healthcare          +7.5%

IT          +7%

Utilities          -4%

Materials          -7%

Energy          -19%.

One could easily argue, purely on mechanical grounds, that the 30% difference in performance between Consumer discretionary and Energy merits at least some rebalancing away from the first toward the second in an active portfolio.

I’m not ready to to this quite yet.  I’d like to see yearend financials first.  But the numbers argue that we’re getting close to the time to act.

 

 

assessing the holiday sales season

The commentators and analysts I read all seemed to argue that this holiday selling season would be sub-par.  They all trotted out the familiar stories of general economic malaise, lack of wage growth, the shrinking of the middle class, globalization, China, warm weather…

We’re now entering the home stretch of the holiday sales race as post-Christmas bargain hunting comes into full swing.  What I find striking is that the results so far have been much better than the consensus had expected.

What catches my eye is the jump in online (and especially online mobile) spending, and the strength of Millennial categories like furniture.

The mismatch between projection and reality seems to me to suggest that the consensus is trend following, and because of that tracking the spending of Baby Boomers–who have dominated the retail scene over the past few decades.  At the same time, it’s failing to capture the emergence of Millennials as an economic force.

The change may be as simple as that Baby Boomers no longer have gigantic home equity to tap to fund current spending.  Or it may be more powerful than a subtraction of the Boomer excesses of the past twenty years.  In either case, the overall economy is likely in better shape than the consensus believes.  And Millennials may be emerging as economic drivers faster than most have thought possible.

 

 

strategy: 2016 vs. 2015

This time last year, my picture of 2015 was that:

–world economies in the aggregate were bottoming,

–early in 2015 the Fed would kick off the long journey of raising short-term interest rates from emergency-low levels toward normal (meaning 2%+)

–the first half of the year would be flat to down as world markets adjusted to the new interest rate regime and confirmed that global economic activity was no longer deteriorating, but

–late in the year there was a chance for a stock market rally as investors began to factor into stock prices their chance of better news coming in 2016.

My biggest worry last December was that stocks normally don’t go sideways for a long period.  They either go up or down.  If the market works out that the up direction is impossible–which I thought would be the case in early 2015–then short-term traders will invariably try to push the market down to see how low it goes before meeting resistance.  What I found most surprising was that the S&P 500 tread water for over seven months before beginning its August-September swoon.

As events turned out, the Fed delayed raising rates until December and emerging markets were hit by a deeper fall in mining commodity prices than I’d anticipated.

One result of that is that stocks are flat for the year vs. my expectation of a positive, but sub-10% gain.

Another is that I think we’re basically in the same position today as I envisioned we were a year ago–and should anticipate a flattish first half for 2016 followed by an uptick sometime in the second.

While this view placed me in the relatively cautious camp last December it places me among the bulls today.

 

More tomorrow.

 

 

 

 

 

winding down for the year

For professional equity investors the final two weeks of the calendar year are perhaps the only time when they can truly rest.  Two reasons:

–virtually every professional is evaluated and compensated on performance over periods–usually one year, sometimes one and three, sometimes one, three and five or other longer time frames–that conclude on December 31st.  As a result, by mid-December one’s personal financial fate is pretty well sealed.  Even those who are very close to thresholds where pay can go way up or way down may elect to remain on the sidelines with fingers crossed.  That’s because the short-term direction of prices is notoriously hard to predict–in fact, academic research argues that fluctuations over, say, a week or two are purely random.  This means yearend tweaks are just as likely to backfire as they are to make performance better.

This is the only time of the year when professionals feel completely safe in taking their hands off the tiller and resting.  It would be crazy not to take the opportunity. Trading volume for the S&P 500 yesterday was about 20% below average, for example, marketing, I think, the start of the yearend lull.

–accountants for asset managers like the books to close neatly.  They don’t want to have trades that have been agreed to in December not settle before yearend, instead hanging over into the following year.  Although every stock exchange has rules about how many days after being agreed to trades are supposed to settle, not all do.

As a result, most asset management companies “request” that their portfolio managers not enter into new bargains during, say, the last two weeks of the year.  Adminstrators take a huge risk if they order PMs to take their hands off the money:  PMs have a fiduciary obligation to do what’s best for their clients, not what’s best for the accounting department.  And there are those poor few who are hoping to rescue their year through a flash of Christmas brilliance.  Still, everyone understands what they’re being asked to do.  And almost everyone jumps at the chance to comply.

Advice for you and me:  watch prices anyway. Sometimes weird price fluctuations happen during the last couple of trading days of the year.  The fact that almost every professional is away from work can cause last-minute buy or sell orders have an unusually large impact on prices.  This can be a great chance to take the other side of the trade, since most of us don’t really care that our trade will settle in the first week of January.