Fear of higher tax sparks end of year sell-off

INVESTORS typically sell stocks to cut their losses at year end. But worries about the fiscal cliff – and the possibility of higher taxes in 2013 – may act as the greatest incentive to sell both winners and losers by 31 December.

The $600bn (£374bn) of automatic tax increases and spending cuts scheduled for the beginning of next year includes higher rates for capital gains, making tax-loss selling even more appealing than usual.

Tax-related selling may be behind the weaker trend in the shares of market leader Apple, analysts said. The stock is down 20 per cent for the quarter, but it is still up nearly 32 per cent for the year.

Apple dropped 8.9 per cent in this past week alone. For a stock that gained more than 25 per cent a year for four consecutive years, the embedded capital gains suddenly look like a selling opportunity if one’s tax bill is going to jump sharply.

“You have a lot of high-net-worth individuals in taxable accounts, and that could be what’s affecting stocks like Apple,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

Of this year’s top 20 performers in the S&P 1500 index, which includes large, small and mid-cap stocks, all but four have lost ground in the last five trading sessions.

The S&P 500 ended the week up just 0.1 per cent after another week of trading largely tied to fiscal cliff negotiation news, which has pushed the market in both directions.

This week’s Federal Reserve meeting could offer some relief, with a policy statement expected on Wednesday.