Selling pressure could ease once tax bills are paid

  • According to Fundstrat, the selling pressure on US equities may ease after the passage of tax day on April 18.
  • Some investors are facing big tax bills after a strong 2021 in the stock market and are selling stocks to raise cash.
  • “Our work shows that ‘capital gains’ fundraising is worse in years when S&P 500 gains were strong,” Fundstrat said.

Selling pressure in the stock market could ease next week once Tax Day passes on April 18, Fundstrat’s Tom Lee said in a note on Wednesday.

After a strong 2021 for the stock market, cryptocurrencies and NFTs, some investors are likely facing significant tax liabilities that are due next week. And to meet those tax obligations, many investors likely sold stocks to raise cash.

‘Our work shows that fundraising for ‘

capital gains

‘ is worse in [a] year when S&P 500 gains were strong,” Lee explained. The S&P 500 generated a total return of around 29% last year, its strongest year of gains since 2013.

Additionally, Fundstrat found that stocks typically fall the week before tax day when stocks posted strong gains in the previous year, adding to the idea that investors are waiting until the very last minute to sell stocks to raise capital for a big tax bill.

“Since World War II, when markets are strong in a tax year, stocks do poorly on tax day…[because] investors must pay capital gains. They could fund that by selling stocks,” Lee explained.

Fundstrat found that in tax years where the S&P 500 gained more than 20%, median stock market returns in the week before tax day were generally lower, with a rate of gain of just 43%. .

Next week could be a positive inflection for the stock market and provide a solid risk/reward profile for investors as tax day passes and earnings season begins, according to Lee.

“We believe the 1Q2022 EPS season will show corporate margins continuing to rise,” Lee said, adding that this would be a positive factor for further equity price gains. Lee specifically expects companies in the healthcare, consumer staples and discretionary, industrials and energy sectors to post better-than-expected profit margins.


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