The December ritual, and the part of it that is actually about tax

Every December a large amount of selling happens for reasons that have nothing to do with what the sold things are worth, and every January some of it comes back. This is old, well documented, and still routinely described in the press as sentiment.

The mechanical part

Realising a loss to offset a gain is arithmetic, not a view. It is worth doing when the tax saved exceeds the cost of being out of the position or of holding a substitute, and it is worth not doing when it does not. Most of the complexity is in the second half of that sentence.

The part that goes wrong

People sell the thing they were going to sell anyway and call it tax management, or they sell something they wanted to keep and then fail to re-establish it because January was awkward. The second is the expensive one, and it is common enough that I now write the re-entry date down at the same time as I place the sale.

If you are not willing to write down the date on which you will buy it back, you were not harvesting a loss. You were changing your mind.

What it means for prices

Roughly: the losers of the year get sold harder in the second half of December than the news warrants, and thin holiday liquidity magnifies it. That is not a strategy on its own — the effect is small, well known and unreliable in any single year — but it is a reason not to read too much into a December drawdown in something that has already had a bad year.