December Retail Investor Repositioning

December is poised to be crucial for retail investors as they adjust their strategies for year-end taxes, according to a report from Stephens.

On Tuesday, Stephens emphasized the potential for retail investors to utilize tax loss harvesting in a year marked by considerable equity gains and performance disparity, particularly in SMID-cap stocks.

The report indicates that 26% of the 491 Russell 1000 and 45% of the 1,404 Russell 2000 stocks, which are heavily owned by retail investors, have experienced year-to-date losses. This scenario presents numerous opportunities for tax harvesting.

Tax loss harvesting involves selling underperforming stocks to counterbalance gains. Typically, investors use the proceeds to invest in passive equity ETFs with similar traits.

Historical data backs this trend, showing that passive equity ETFs have seen consistent net inflows every December for the past eight years, largely due to tax harvesting strategies.

The report also points out that retail-owned underperformers have had a strong performance in December, doing better in six of the last seven years. The December outperformance has ranged from 0.2% in 2017 to an impressive 12% in 2013, attributed to a shift towards high-quality underperformers.

In contrast, the performance of heavily retail-owned gainers has been less consistent in December. Although they outperformed in the last two years, factors like profit-taking and the influence of passive equity ETF flows have impacted their results.

Stephens anticipates that the largest gainers with substantial liquid holdings in ETFs could perform well in December, while those without such holdings might lag because of retail profit-taking dynamics. The firm believes that December's investment focus will likely revolve around tax harvesting and the interplay of passive equity ETF flows, creating potential opportunities for retail investors to enhance their portfolios as the year closes.