gotchanewsdaily.com 
Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. Here’s a rapid-fire mailbag commentary, which answers nine questions from members. At the end of the year, we start hearing about the Santa Claus rally and tax-loss harvesting. Can you explain what these mean and what an individual investor should consider doing? Thank you! Reneta A very timely mailbag. The so-called Santa Claus rally refers to a seasonal pattern that takes place in the final five trading days of the year and the first two of the new year. Over this seven-day stretch, the S & P 500 has historically grinded higher — 1.3% on average since 1969, according to the Stock Trader’s Almanac . This time around, the Santa Claus window covers Dec. 24 and then Dec. 26-31, followed by Jan. 2-3. The market is closed on both Dec. 25 and Jan. 1 for the holidays. Seasonal patterns aren’t always rational, and the cause of them is sometimes hard to determine. However, if we think about what happens before and after the Santa Claus rally, we can gain some understanding of why it might occur. To do this, let’s start by addressing the second part of the question: tax-loss harvesting. This is the practice of selling underwater positions in a portfolio to realize losses and offset gains elsewhere, with the ultimate goal of reducing one’s tax burden for the year. Tax-loss harvesting can happen at any point in the year, but it tends to come into focus in December because it’s the last chance before year-end to lock in the realized gains and losses for a portfolio. For the same reason — an effort to minimize realized gains — we may see investors look to hold on to winners so close to the end of the year. The thinking is that, if you can push the sale into next year, then you can also push out the tax liability for another year. Put the two together, and we have a dynamic in December in which investors are incentivized to sell losers and stick with their winners. As we get closer to the end of the year, the amount of tax-loss harvesting tends to ease up, with investors getting their sales in before trading volumes decline around the holidays — and that may help explain the existence of the Santa Claus rally. Basically, as the selling pressure on year-to-date losers subsides, those stocks become less of a drag on the S & P 500. Meanwhile, investors are more reluctant to part with their winners, enabling those stocks to grind higher thanks to a lack of sellers. Understanding the Santa Claus rally also requires us to consider what’s known as the January effect, which is another seasonal trend in which stocks tend to rise to start off the new year. It also isn’t always clear why this occurs. However, one reason could be the rebuying of names sold to harvest tax losses. Here we see another reason as to why tax harvesting may be better done toward the beginning of December — the wash rule. The wash rule essentially states that investors must wait 30 days to repurchase a security sold for loss, otherwise you won’t be allowed to realize those losses on your tax statement. Once the 30 days are up, however, investors may look to buy back their recently sold securities — after all, these beaten-up stocks in the prior year may, come mid-January, start offering an interesting opportunity for returns in the new year. The overarching takeaway? The seasonal effects observed during the Santa Claus rally period may be the result of tax-loss harvesting easing up, investors sticking with their winners to delay their tax burden, and low volume around the holidays as investors take a break from their screens. On the other side, the January effect may be the result of investors piling back into the stocks they sold for tax purposes — once 30 days has passed — on the belief that there is still upside to be found. The January effect may also contribute to the Santa Clause rally. If investors believe in the January effect and want to position for a generally strong month, then they need to get in early — an additional factor that could explain the historic strength of the seven-session Santa Claus rally window. It’s important to note: Traders aren’t necessarily as concerned with why the seasonality happens. Their concern is simply the existence of the historical pattern, and that can steer their decisions. So, what does all that mean for the individual investor? Well, if you’re trying to trade it, you now have some sense of the dynamics at play, which should improve your understanding of the action. However, if you’re a long-term investor — as we are at the Club — then it shouldn’t impact your allocation or strategy too much, expect to say that the end of November into early December is a good time to review your portfolio to potentially identify opportunities to reduce your tax burden. It’s helpful to monitor seasonal patterns, but in general, they shouldn’t serve as the basis for long-term investment decisions. To be sure, while we kept it high-level and simple in this answer, taxes are complicated. Holding periods matter when determining a tax rate associated with gains and losses, as does your personal financial picture. In this instance, we’re talking about taxes in the context of an investment portfolio, but all sources of income will be considered come tax time – and so will any realized tax credits, such as those stemming from the purchase of an electric vehicle or home solar installations. For that reason, it’s important to understand all the personal dynamics at play, and it may be helpful to speak with a tax advisor as you ponder any tax-harvesting moves. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. Here’s a rapid-fire mailbag commentary, which answers nine questions from members.
At the end of the year, we start hearing about the Santa Claus rally and tax-loss harvesting. Can you explain what these mean and what an individual investor should consider doing? Thank you! Reneta
