Andrew Pyle
November 15, 2024
Trump train running out of steam just in time for tax loss selling
Market participants have spent the past several days digesting last week’s U.S. election and the resulting red wave, now that the Republicans also have a majority in the House of Representatives and the Senate. Throw in the majority in the Supreme Court and one could say that we might be a little short on both checks and balances. As investors try to figure out the likely paths for the economy, corporate earnings and valuations next year, we have definitely seen momentum in U.S. equities fade this week, even though Canadian stocks have enjoyed continued upside. Considering that stocks had their best post-election day on record, a pause was to be expected. How long of a pause is up for discussion.
At the time of writing, all major U.S. indices were down significantly, from a 1% drop in the Dow Jones to close to a 4% decline in the Russell 2000. The Mag 7 was off about 2.3%. Even Tesla, which had soared right up to Monday, has reversed course in rapid fashion since and was looking at close to a 2% retreat for the week. It would seem that having Musk in an administration that wants to cut government EV rebates is not exactly giving investors the warm and fuzzies.
By contrast, even with the 0.6% dip by Friday morning, the TSX had just come off another record close on Thursday and it has seen fairly decent breadth. We saw a 41% gain in Shopify on the week, but decent gains in energy, chemicals, software and retail. As bullish as the week was for Canadian stocks, momentum may also fade as we head into the second half of the month.
Our view since the election has been that the next 60 days should be relatively uneventful, as markets will wait until they see policies flow from the new White House before making any hard positioning calls. Barring a geopolitical shock, domestic fundamentals look fairly steady and with the October consumer and producer price data in hand, a Fed rate cut in December still looks likely (alongside another move by the Bank of Canada). No, any sort of pullback will have less to do with underlying sector drivers and more to do with seasonal patterns.
For Canadian investors that have triggered capital gains in their non-registered portfolios over the course of the year, or are simply doing some pruning based on the strong gains to-date and politically-related risks ahead, this is the time when the focus shifts to minimizing the tax impact from gains realized.
Just as a refresher, current tax rules allow an individual or company to trigger capital losses on securities that are underwater and then apply those losses to gains made during the year. The federal government’s change to capital gain inclusion rules complicates the discussion, but the general premise still holds. In addition, we usually adhere to the strategy of minimizing distortion to the make-up of the portfolio. What I mean by this is that if we sell a stock in a particular sector and our belief is that this sector represents upside opportunity, then we would want to replace the stock that is sold with one that is highly correlated with it or the sector.
The above chart and commentary are for information purposes only, and not a recommendation or endorsement to buy, hold, or sell any security.
Now, you would think that in a year where the TSX has delivered double-digit gains and is trading at an all-time high, that it would be hard to find a significantly large number of companies that are in the red. In fact, of the 220 companies in the index, 60 are showing year-to-date losses of 1% or more, representing just under a fifth of the overall market cap of the index. And, similar to the diversified nature of this week’s advance in the TSX, the list of losers is equally broad, from energy to leisure and from pharma to tech. The majority of the stocks that are down are in the small-cap space (42 of the 60), but there are some notable large-cap companies. TD, BCE, Magna, Rogers and Nutrien to name a few.
All of those stocks and sectors that have seen weakness this year have so for different reasons. Some are transient, like interest sensitives that have been negatively impacted by higher rates, while others are impacted by industry fundamentals (commodity prices) and company-specific factors. A number of the stocks in this list have begun to recover ground and/or holding above key technical support levels. Others are still looking for a floor and are vulnerable to continued selling pressure going into December.
In examining the impact that tax-loss selling might have on those companies, we do have to pay close attention to market cap for a couple of reasons. In the case of large-cap (index) institutional funds that might be looking to trim exposures to the overall market and lock in gains before year-end, any losses that can be harvested will also be in the large-cap group. Second, for many Canadians with individual stock portfolios, chances are that there will be a heavier reliance on larger well-known companies. There are 9 companies with market values exceeding $10 billion and which have year-to-date losses north of 5% - CNR, Telus, Restaurant Brands International, TD, Nutrien, Rogers, Magna, Open Text and BCE.
These companies don’t necessarily face any imminent threats in terms of fundamentals and some might show improvement in an environment where the North American economy continues to grow (or accelerate, due to lower taxes in the U.S. and falling interest rates). For that reason, some investors looking for tax loss candidates may look at similar investments, but with an intention to reinvest after the 30-day window. Still, some might be approaching levels that represent real value to investors looking to gain exposure or looking to rebalance away from companies that are now trading at very expensive valuations.
Bottom line, stocks on both sides of the border are probably in store for at least a mild setback as we he close out November. A pause would be a healthy alternative to an excessively overvalued market that risks being popped like so many other bubbles in the past. Keep in mind also that we might get a Santa Claus rally in December, which could limit the downside from any retracement. It will be the weeks following inauguration where investors are going to have to sharpen their pencils and position for the new year.
On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.
Andrew Pyle
Related posts
Andrew Pyle
August 07, 2026
The Kids Are Alright
We keep hearing about the "K-Shaped Economy", but exactly how is it showing up in the consumer segment of the market? Let's have a look.
Read moreAndrew Pyle
July 31, 2026
Q2 recap for the Pyle Team
We’re closing out July with a different kind of update—one that focuses less on markets and more on the people behind the work, with team reflections on Q2 and Andrew’s perspective on the Fed.
Read more