Finding Tax Losses After A Banner Harvesting year
PGIM Custom Harvest shares views on the evolving tax-loss harvesting landscape and how direct indexing can help investors capture stronger after-tax returns.
Following severe market declines in 2022, the S&P 500 rebounded early in 2023 but has been range-bound since then. Mega-cap stocks—primarily in the communication services, information technology, and consumer discretionary sectors—have driven gains in U.S. markets. Most other sectors are struggling to produce meaningful gains or have declined.
Stresses that emerged in the banking system in March should lead to tighter credit conditions, tempering expectations for the world’s largest economy. Weaker growth prospects and higher costs add downside risk to the earnings outlook, possibly exacerbated by reduced access to capital as banks adjust in response to recent developments in the sector.
As investors consider the right time to reallocate their portfolios or add additional risk—perhaps by selling stocks that bounced back strongly since last year’s fourth quarter, rebalancing with greater fixed income exposure, or expanding into other asset classes—they should also evaluate an allocation to tax-loss harvesting strategies. Economic uncertainty, ongoing equity market volatility, and recession risks offer investors expanded opportunities for this strategy.
Tax-loss harvesting provides broad equity exposure and, importantly, can help investors seeking a tax-friendly portfolio transition both today and in the future. Capturing capital losses now can offset today’s capital gains distributions, but these losses can also be carried forward to offset capital gains in the future.
Adding a tax-loss harvesting allocation to a portfolio is a relevant strategy throughout market cycles because investors can experience losses at any time.
Adding a tax-loss harvesting allocation to a portfolio is a relevant strategy throughout market cycles because investors can experience losses at any time. When executed successfully—particularly during times of volatility—tax-loss harvesting can serve as an important component of long-term wealth management success.
Additionally, investors who harvest losses as they become available throughout the year, rather than waiting until year-end, may benefit from finding more losses to harvest. For example, as outlined in the chart above, average annual sector returns have ranged from 7.7% to 16.7% since 1990. At the same time, the average annual drawdowns ranged from -12.4% to -21.2%. Even in a sector’s best year, the intra-year drawdown can be significant. While opportunities exist regularly, this data suggests they must be tracked regularly in order to capture them.
Head of PGIM Custom Harvest
Risks—Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. S&P 500 Index is an unmanaged index of 500 common stocks of large U.S. companies, weighted by market capitalization. Indices are unmanaged and are provided for informational purposes only. Investors cannot directly invest in an index
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