Any potential year-end stock market rally will be at risk of sputtering out due to tax-loss harvesting opportunities, according to DoubleLine CEO Jeffrey Gundlach.
In an interview with CNBC on Thursday, he said he is skeptical of any year-end rally because “everything is down.”
“There are so many losses to be harvested in every category. The only thing that is up year-to-date is the dollar and commodities. That’s it. And the only thing that is up since the Fed started going to 75s [basis point rate hikes] is the dollar,” Gundlach explained.
Not only are stocks down big so far this year, but bonds are too thanks to the Federal Reserve’s aggressive interest rate hikes.
So most investors, whether they own stocks or bonds, should have plenty of opportunities to harvest losses between now and the end of the year. And that means there will be more selling pressure ahead.
“There will be pretty high tax loss selling I would think. I even got a white paper from somebody saying this was the greatest tax loss selling opportunity of a generation. I would say it might be two generations,” Gundlach said.
Tax-loss selling is a tax optimization strategy that investors and financial advisors often take advantage of in taxable accounts heading into year-end. The strategy involves realizing losses by selling out of losing positions, and then buying back those portfolio positions 31 days later to avoid the tax wash-sale rule.
The strategy allows investors to realize losses that can offset future realized gains, ultimately helping reduce tax liabilities in the long term.
With some widely held stocks like Meta Platforms and Amazon down big year-to-date, investors may be waiting until after the tax-loss harvesting period ends at the start of next year before rushing in to buy.
In the meantime, Gundlach recommends investors stick with bonds as they offer a better value relative to stocks thanks to the rise in interest rates.