a stealth selloff?

Typically the US stock market sells off in September/October. What motivates the decline is preparation for the end of the mutual fund tax year on Halloween, and the distribution of realized gains that follows. In the earliest days of my investing career–that is to say, in the late 1970s-early 1980s–the seasonal selloff came in November/December instead, because the biggest market players back then were banks and insurance companies, whose fiscal year ends on New Year’s Eve.

As I’m writing this, we’re three weeks into September and the S&P 500 is roughly flat so far this month. Typically, fund accountants ask managers not to transact a lot during the last two weeks of the fiscal year, to minimize the (miniscule, in my experience) chance of an unsettled trade carrying over past yearend. So we’re running out of time for a significant period of portfolio overhaul. What’s going on?

Three thoughts:

–there’s still time for something to trigger selling–like the rising oil price–so it’s too early to conclude that no seasonal selloff will occur this year. It is time for some head scratching, though

–large flows tend to come into mutual funds/ETFs at the top and to go out at the bottom. So it’s thinkable that stock mutual funds in general already have large tax losses from redemptions late last year and early this. Remember, too, most Wall Street strategists were calling for a substantial market decline in early 2023, creating an atmosphere encouraging customers to sell (at much lower prices than today’s). So maybe funds already have a bunch of realized tax losses. If so, that part of annual tax planning is already done. What remains is to offset those losses by trimming winners

–there’s some evidence that this last is happening. NVDA, for example, is off by about 10% this month, MSFT and AAPL by around 5% each. ARKK, which is still up by 30%+ in 2023, has declined by about 7% this month (not a comment about the ETF’s flows, rather the recent performance of holdings that have been up a lot so far in 2023).

I’d been thinking that if the typical seasonal selloff were to happen, that would be a great chance to pick up stock being sold purely for tax reasons, not for any weakness in company business. Maybe there’s still a chance, but time doesn’t seem to be on my side.

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