Stock Market Nerd – Turning the Calendar – January 5, 2024
The first week of 2024 was certainly a volatile one. Volume returned to exchanges on Tuesday and volatility kicked back in following a tranquil end to 2023. I don’t focus on short-term price action, but I did want to discuss this phenomenon in a bit of detail and where the sharper price action came from.
In my mind, it stemmed from two places. First, 2023 was a very fun year. Most quality companies were convincingly up year to date with a few notable mega-cap standouts carrying the indexes notably higher. Fund managers without solid stakes in the “magnificent 7” (FAANG + Nvidia and Microsoft), had some explaining to do to their investors wondering why they missed the boat. This likely added buying pressure to the biggest winners through the end of the year to appease investor concerns over holdings. More buying pressure means higher prices – all else equal.
Secondly, year to date profits in 2023 mean capital gains taxes for those choosing to liquidate winning positions in the calendar year. If those positions are sold off after January 1st, investors can delay the taxation event by over a year. That is the rational decision considering that cash can safely earn you 5% in today’s environment. When combining these two factors, we are left with more incentive to bid up winners and less incentive to sell them into the New Year. The calendar turned, and those incentives reversed while seasonally light volume returned to more normal levels. You’ll likely notice that your best performers from 2023 were hit the hardest at the beginning of the week. This is likely why.
To be candid, this type of price action is not something I care about or want to manage my portfolio around (aside from delaying taxation). After all, for us long-term investors, demand and profit compounding are by far the two most important things that matter for returns. I simply think it helps to understand where the sudden price action came from. Knowledge is power.
