Typically in close to half-century I’ve been watching financial markets, the period from early September through early October has been a weak one for US stocks. That’s because trading is dominated by mutual fund selling in advance of book closing at the end of their October fiscal year.
As I’ve written before, this book closing itself is an odd process. Mutual funds are exempt from income tax on their realized gains, avoiding the normal double taxation of corporate dividends (which are paid from after-tax corporate income but whose recipients are also subject to income tax on them). They are required, however, to pay out all their realized gains as dividends to shareholders, who are subject to income tax on these payments. Traditionally, mutual fund holder like to receive these payments, and regard them as a mark of a fund’s success. However, almost everyone has the distributions automatically reinvested, so all they ever see is the tax bill.
The old school portfolio cleanup, resetting and dividend creating–each of which entails selling–hasn’t happened so far this year. My first thought was that maybe ETFs–which don’t have the mutual fund distribution issue–have become big enough that they dominate the markets. According to Citibank, though, although ETFs have had explosive growth, they hold only about half the assets of traditional mutual funds.
It’s possible, I think, that because ETFs are very popular and they typically don’t make distributions to owners, maybe mutual funds–or their holders–no longer see the need to distribute, say, 3% of the assets every year. Or maybe the lightbulb has gone on for shareholders that the distribution is mostly the occasion for Uncle Sam to get a cut of the profits.
Of course, there’s still time between now and mid-October for a fund-induced selloff to happen. Strange, though, that there’s little sign of one so far.
Another thing:
I happened to turn on CNBC this morning to watch prices on the crawl at the bottom of the screen. There was a discussion underway among the commentators about the topic above, the lack of a seasonal selloff so far. The exchange was embarrassingly bad. It struck me for the first time that this was like watching a sports talk show where none of the panel had ever played any sports ever, even in grammar school–yet were presenting themselves as informed experts. Weird. But if you’re the only game in town, I guess you can set the bar as low as you want.