November 2023 started with strong price gains on the stock market. Above all, the further pause on interest rates by the US Federal Reserve Bank and the weakening US labor market boosted investor sentiment at the beginning of the month. But there is another factor that has made November the strongest stock market month of the year for several decades, according to experts at Bank of America.
• November was the best month for the stock market since 1950
• Investment funds in the USA with a strategy to reduce the tax burden
• Sales of losing stocks until the end of October, buybacks from November
Whenever the year comes to an end, investors begin to hope for a year-end rally. Stock performance in the traditionally strong month of November is often likely to provide tailwind for such speculation. As “Business Insider” reports, citing data from LPL Research, November has typically been the strongest stock market month of the year since 1950 and also marks the beginning of the strongest two-month and six-month periods for stocks.
This year, November started off strong again and seems to be living up to its reputation. The reason for the party mood on the stock markets at the start of the month was, among other things, the US Federal Reserve, which left the US key interest rate unchanged for the second time in a row in November, as well as the US labor market, which is finally showing signs of weakening and thus making a less restrictive monetary policy possible. However, in addition to current events, investment funds in particular are likely to ensure that things traditionally go up on the stock markets in November. This is because they usually follow a special strategy in the USA at this time of year to save taxes.
Strategy of US investment funds: Harvest losses in the fall
As “Business Insider” reports, the tax law in the USA sets October 31st as the deadline for the tax-relevant realization of profits and losses for investment funds. For private investors, however, the deadline is December 31st. In order to reduce their tax burden, investment funds in the USA pursue the so-called “tax loss harvesting” strategy. Before the deadline, they sell stocks whose performance has been negative since the beginning of the year in order to convert these positions into realized losses. They can then offset these against taxes that have already been realized and therefore have to pay less money to the state. After a certain waiting period – usually at least 30 days, in order not to violate laws on fictitious transactions – the investment funds use the money from the sale to buy back the corresponding shares.
According to experts, these buybacks in particular, which can begin between the beginning and the end of November depending on the timing of the sale, can drive the stock market higher at the end of the year. “We have historical evidence of tax optimization sales by institutional investors in October (peak outflows) and by retail investors before the December 31 deadline […] seen. The flows for both groups typically reversed in the following months,” Savita Subramanian from Bank of America explained the phenomenon according to “Business Insider.” So after October, the investment funds usually increase strongly again and thereby have a positive influence on the market – After all, US investment funds with a total of more than $20 trillion in assets under management have a major influence on the market, according to “Business Insider”.
These stocks could benefit from the investment fund strategy at the end of the year
As the Bank of America expert explained to MarketWatch, high-quality stocks that have lost more than ten percent of their value between January 1 and October 31 are the ideal candidates for the tax strategy of investment funds. This group will “outperform the S&P 500 by an average of 1.9 percentage points over the next three months with a hit rate of 70 percent,” says Subramanian.
In 2023, the investment funds are likely to have found suitable losing stocks for their strategy again, because, as Business Insider reports, over a third of the stocks in the S&P 500 would have lost more than ten percent of their value in 2023 – at least before November. According to a list from Bank of America, which is available to MarketWatch, this group also includes quality stocks such as Buffett’s favorite Coca-Cola, the home improvement chain Home Depot and the US banking giants Goldman Sachs and Citigroup. You could now be facing a significant rebound.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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