Portfolio Strategy
2022 Tax-Loss Selling Season: Less Money, New Problems
Our View:
Ahead of the 2021 tax-loss selling season, we published our Portfolio Strategy report titled “Mo Money, Mo Problems”. Our goal with this piece was to help guide investors heading into year end with rebalancing their portfolios. At the time of writing, the stimulus taps were wide open, unlike today, which helped to propel global equity markets higher including the S&P/TSX and S&P 500 indices which rallied +27%. As we noted then, the abnormally strong equity market performance in 2021 was indicative of several unique variables (e.g., near-zero interest rates, extreme levels of accommodation – both monetary and fiscal, strong corporate and household fundamentals, etc.), which we did not expect to see a repeat of in 2022. We advised investors to consider taking profits/crystalizing gains within their portfolios. In particular, we suggested investors seek out sell/trim candidates within sectors trading at peak/or extreme valuations – i.e., information technology and consumer discretionary sectors in the U.S. and Canada – and to redistribute these funds across more attractive sectors/securities.
For the 2022 tax-loss selling season, we suggest investors follow the same two strategies within their taxable accounts, but in reverse order – tax-loss selling first and crystalizing gains second. In particular, investors should consider taking profits in stocks trading at extreme valuations versus history, have higher earnings risks and/or have high cyclical exposure, while allocating to sectors/stocks that are trading at the opposite extreme with lower relative earning risks. At the stock level, we prefer companies with strong quality characteristics including those with strong competitive advantages, high earnings durability/lower earnings variability throughout the economic/market cycle, and which are led by great managers with a long track record of success. Finally, in the accompanying Excel files, we list stocks listed on the S&P/TSX and the S&P 500 indexes, which are down 20% or more YTD, along with the corresponding ETFs which have a high positive correlation of at least 0.4 (over the past 2-years) in most cases to each of the stocks listed.
Please note that the last day to sell securities on Canadian/U.S. markets to realize a gain or loss is December 28, 2022. Click here for additional year-end tax planning opportunities.
Recent commentary from the Investment Strategy team:
- Client Insights: Market Commentary (Nov 1, 2022): Make It Stop
- The Advantaged Investor Podcast (Oct 28, 2022): Q3 equity and fixed income review and look ahead
- Client Insights Presentation: Quarterly Update and Market Outlook
- Asset Allocation Quarterly (Oct 4, 2022): Too Fast, Too Furious
- Client Insights: Market Commentary (Oct 3, 2022): What’s in Style for U.S. Equities?
- Portfolio Strategy (Sept 16, 2022): The Changing Seasons Summer to Fall, but Not Yet Winter
S&P500_S&PTSX Tax Loss Selling Candidates & ETFs
