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Window Dressing and Tax-Loss Harvesting

In the Merriam-Webster dictionary, window dressing refers to the display of merchandise in a retail store window or the act or an instance of making something appear deceptively attractive or favorable.

In the financial world, window dressing is a strategy deployed by money managers, hedge funds, traders, and trading professionals to improve the appearance of a fund or its performance before presenting the results to clients, investors, or shareholders. To window dress a fund or a stock's portfolio, the trading professional will likely seek to sell losing stocks (markdown losers) and buy winning stocks (markup winners) into the end of the year.

Retail investors also perform a similar strategy, typically referred to as tax-loss harvesting. It is a yearly strategy performed each year toward year-end. Investors reduce taxable capital gains by selling losing positions to offset capital gains before year-end. Although it is debatable whether selling an investment solely for tax reasons is a viable strategy, many investors undertake tax-loss harvesting strategies at the end of every tax year.

The combination of window dressing by institutional investors and tax-loss harvesting by retail investors can have undue influence on the directional trends of stock market indexes, at least from a near-to-intermediate term basis.

Given the challenging returns this year, it is likely window dressing and tax-loss harvesting activities may be greater than in previous years. Also, the last triple witching options expiration of the year is this Friday, and the unwinding or rolling over of various hedging strategies can lead to an increase in market volatility.

Enclosed are the year-to-date performances of US stock market indexes, S&P 500 sectors, and the top 25 and bottom 25 SPX stocks as of 12/14/22 where potential window dressing and tax-loss harvesting opportunities and risks may arise into the end of the year.

Dow Jones Industrial Average (INDU -7.16% YTD), NYSE Composite Index (NYA -10.05%), S&P 400 Mid-cap Index (MID -12.39%), S&P 600 Small-cap Index (SML -15.76%), S&P 500 Index (SPX -16.70%), Nasdaq 100 Index (NDX -28.85%), and Nasdaq Composite Index (COMPQ -29.44%).

S&P 500 leadership sectors: Energy (XLE +45.98% YTD), Utilities (XLU +4.63%), Healthcare (XLV +1.62%), and Consumer Staples (XLP +1.11%).

S&P 500 Sectors: Communication Services (XLC -35.61% YTD), Consumer Discretionary (XLY -33.64%), Technology (XLK -23.01%), Real Estate (XLRE -22.09%), Financials (XLF -11.09%), Materials (XLB -6.89%), and Industrials (XLI -2.58%).

Top 25 performing S&P 500 stocks (YTD):

Constellation Energy Corporation (CEG +144.00%), Occidental Petroleum Corporation (OXY +121.73%), Hess Corporation (HES +85.29%), Enphase Energy Inc. (ENPH +78.20%), Exxon Mobil Corporation (XOM +75.27%), Marathon Petroleum Corporation (MPC +73.65%), Schlumberger NV (SLB +70.45%), APA Corp. (APA +70.44%), EQT Corporation (EQT +70.15%), Marathon Oil Corporation (MRO +68.57%), ConocoPhillips (COP +62.53%), Halliburton Company (HAL +61.78%), Valero Energy Corporation (VLO + 60.47%), Cardinal Health Inc. (CAH +51.99%), EOG Resources Inc. (EOG +50.79%), McKesson Corporation (MCK +49.29%), Chevron Corporation (CVX +47.87%), Merck & Co. Inc. (MRK +44.72%), Cigna Corporation (CI +43.82%), Phillips 66 (PSX +40.95%), Devon Energy Corporation (DVN +40.70%), Vertex Pharmaceuticals Incorporated (VRTX +39.84%), Targa Resources Corp. (TRGP +39.24%), CF Industries Holdings Inc. (CF +38.19%), and Archer-Daniels-Midland Company (ADM +37.93%).

Bottom 25 performing S&P 500 stocks (YTD):

EPAM Systems Inc. (EPAM -45.48%), West Pharmaceutical Services Inc. (WST -46.29%), Salesforce Inc. (CRM -46.63%), Netflix Inc. (NFLX -46.83%), Expedia Group Inc. (EXPE -47.77%), CarMax Inc. (KMX -48.41%), Advanced Micro Devices Inc. (AMD -50.21%), DISH Network Corporation Class A (DISH -50.22%), Seagate Technology Holdings PLC (STX -50.28%), Lincoln National Corp (LNC -52.42%), Warner Bros. Discovery Inc. Series A (WBD -53.74%), Tesla Inc. (TSLA -54.31%), Lumen Technologies Inc. (LUMN -54.74%), Carnival Corporation (CCL -55.72%), Zebra Technologies Corporation Class A (ZBRA -55.77%), Stanley Black & Decker Inc. (SWK -56.11%), PayPal Holdings Inc. (PYPL -60.92%), V.F. Corporation (VFC -61.19%), Signature Bank (SBNY -62.90%), Catalent Inc. (CTLT -63.46%), Meta Platforms Inc. Class A (META -64.28%), Match Group Inc. (MTCH -64.54%), SVB Financial Group (SIVB -65.48%), Align Technology Inc. (ALGN -69.78%), and Generac Holdings Inc. (GNRC -71.93%).

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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