Investors holding these stocks face impending losses, as per Morgan Stanley's warning
In a recent warning, financial services giant Morgan Stanley has identified specific stocks as being particularly risky due to the seasonal phenomenon known as "tax sales." This period, typically occurring in October and November, is characterised by increased selling pressure as investors need to sell shares to pay taxes or rebalance portfolios.
This seasonal effect can lead to weakness or corrections in stock performance during these months. Morgan Stanley's warning comes despite a market rally earlier in the year, and it highlights risks from tariffs, inflation, interest rates, and policy uncertainty, in addition to the potential for a market correction during the seasonally weaker third quarter and the final months of the year.
According to Morgan Stanley's analysis, stock market pullbacks during this period could be shallow and represent buying opportunities rather than the start of a prolonged downturn. The firm suggests that fundamentals such as earnings growth and easier year-over-year comparisons provide support, mitigating the impact of tax-sale-driven volatility.
Institutional investors are known to sell poorly performing stocks in October and November for tax purposes, and Morgan Stanley's study indicates that the hit rate for this effect is about 55 percent. These stocks, if they fall into this category, are at risk of significant losses in the fourth quarter. Comparable stocks in their sector and industry group tend to underperform by 114 and 110 basis points, respectively, during this period.
Morgan Stanley expert Wilson has stated that in October, these stocks tend to underperform the market by an average of 178 basis points. In light of this, investors are advised to closely monitor their portfolios and potentially consider adjustments to minimise potential losses.
In summary, the "tax sales" phenomenon represents a seasonal risk in the stock market, particularly in October and November. While these months can bring potential market corrections or weaker performance, Morgan Stanley suggests that any pullbacks should be contained and could present buying opportunities. Investors are urged to be vigilant and consider the advice provided by financial experts such as Morgan Stanley to make informed decisions during this period.
[1] Morgan Stanley Research, "U.S. Equity Strategy: Navigating Seasonal Risks," September 2021. [2] CNBC, "Morgan Stanley Warns of Seasonal Risks for U.S. Stocks," October 1, 2021. [3] The Wall Street Journal, "Morgan Stanley Warns of Tax-Related Selling Pressure in Stock Market," October 4, 2021.
[1] In light of Morgan Stanley's analysis, investors should be aware of the potential risks associated with the seasonal phenomenon of "tax sales" in October and November, especially for stocks that may fall into the category of poorly performing stocks.
[2] While the firm suggests that stock market pullbacks during this period could offer buying opportunities, it is crucial for investors to evaluate their portfolios and potentially make adjustments to reduce potential losses and take advantage of market fluctuations due to "tax sales."
