The impressive rise in the stock market, after the precipitous drop off, has made for quite an interesting past 16 months but are we indeed out of the woods? There are prognostications of a possible double dip as the stock market rebound may have outpaced the rate of economic recovery in the near future. Some of the present bad news includes: housing starts look dismal, unemployment numbers are likely to rise a bit more, and the value of the US dollar relative to certain other currencies continues to deflate with gold and oil rising. Many of these issues are likely already factored into our forward-looking market and likely do not provide trigger points for a large decline in equities. Scanning through news wires, social media sites, and general communications channels one finds few discussions on what would instigate or trigger a large dip in the stock markets.
One possible trigger mechanism that we have not yet heard discussed critically to the author’s knowledge is end of the year tax selling. Why would this be a trigger? Although we have had the stock market fall so perilously late in 2008, the rebound in calendar year 2009 has been quite substantial. Many mutual fund investors will be hit with large capital gains and dividend outlays next month if they continue to hold onto their funds through the end of the year. To mitigate such tax implications mutual fund investors may sell prior to the end of the year offsetting large gains in 2009 by losses in 2008. Would mutual fund managers also fear a correction may be instigated by end of the year selling and therefore take preemptive measures moving out of stocks into cash or other protective securities thus exacerbating the decline?