Stocks drop in thin year-end trade amid tax selling, profit taking

(Reuters) -Tech and growth stocks dragged Wall Street's main indexes lower on Friday, at the end of an upbeat holiday-shortened week that was driven by expectations around a traditionally strong period for markets.

The Dow Jones Industrial Average fell 0.95%, the S&P 500 was down 1.33% and the Nasdaq Composite briefly was down 1.72%.

COMMENTS:

SAM STOVALL, MARKET STRATEGIST, CFRA, ALLENTOWN, PA:

“Investors had been saying, oh, I’ll take profits in the new year, and then I can wait to pay taxes on them until 2026; now some of them are wondering how much of those profits will still be around, so they’re just grabbing them now. And there are just more profits to take when it comes to the Nasdaq, which is up more than 30%. There’s a lot of uncertainty about how we’ll do in the first weeks or so of the new year. If the market is indeed worried about inflation, then as we head into 2025, those are likely to be some readings that aren’t so good. But the expectations for earnings growth are still strong, thanks to increased productivity and higher profit margins. The flip side? Valuations are at a 40% premium to the 20-year average for S&P 500 stocks.”

JEFF SCHULZE, HEAD OF ECONOMIC & MARKET STRATEGY, CLEARBRIDGE INVESTMENTS, NEW YORK CITY:

“The Santa Claus rally came a bit earlier this year, and I think this is profit taking ahead of another holiday-shortened week next week. That’s another reason I think this isn’t causing more apprehension heading into a weekend: it’s not uncommon for the market to hit air pockets when the volumes are light, and it’s been a slow week. Any volatility we witness should be a good buying opportunity.”

“There is selling in Magnificent 7 stocks because they’ve accounted for 100% of all the profits in the S&P 500 so far this month and have outperformed the equal-weighted index, which is down. But the megacap leadership this time felt more like it was the result of a short squeeze; that investors who had been relatively underweight bringing their holdings back to benchmark levels. I think those exaggerated moves higher mean we could see the Mag 7 continue to lag over the next week or two.”

ADAM TURNQUIST, CHIEF TECHNICAL STRATEGIST FOR LPL FINANCIAL:

“Big tech is taking a much-deserved holiday break after doing most of the heavy lifting for the broader market since Election Day (the Magnificent Seven has contributed to around 85% of the S&P 500’s +4% gain since November 5). However, selling pressure today has expanded beyond just the mega caps as over 90% of S&P 500 constituents are trading in the red. And while it is hard to put a lot of weight in a thinly-traded holiday-shortened week, the latest relief rally has lost momentum and bulls are faced with another test at the 50-day moving average into the weekend. A failure to hold this level (5,940) would point to a likely retest of the November price gap near 5,860. Damaged market breadth and the lack of momentum indicators with bullish signals point to elevated near-term downside risk. The macro backdrop also has become more challenging for a sustained recovery, especially with 10-year Treasury yields and the dollar breaking out above key resistance levels last week.”

ALEX MORRIS, PRESIDENT & CIO, F/m INVESTMENTS, WASHINGTON, D.C.

“Over the past decade, and more so since the COVID melt-up, equity markets have increasingly become liquidity dependent. Slow days, like now, lack the enthusiastic investor plowing in or moving around large cash piles, and tend to lag. It seems there are no low-volume ‘green’ days any more. Add in tax-loss harvesting, which is still an option beyond the ten largest stocks in broad market indexes, and today’s ‘red’ looks less scary. The lesson is: this market thrives on liquidity – and it may just be dependent on it.”

STEVE SOSNICK, CHIEF MARKET STRATEGIST, INTERACTIVE BROKERS, GREENWICH, CONNECTICUT

"I’ve heard anecdotes that pension funds are rebalancing ahead of year-end, selling stocks and buying bonds. Unfortunately, I can’t verify that, but it would explain the sudden sell-off on no news. And of course, if large funds are selling stocks en masse, the megacap tech stocks would bear the brunt because of their heavy weighting in major indices."

"If nothing else, today is a reminder that just because a 'Santa Claus' rally is a statistical likelihood, it is far from guaranteed."

“We’ve seen an attempt at a buy-the-dips rally smacked back, which seems to confirm that this is some selling or rebalancing underway by a big investor.”

JAY WOODS, CHIEF GLOBAL STRATEGIST, FREEDOM CAPITAL MARKETS, NEW YORK

"What people are doing is they're raising some cash. They're taking some profits right now as we go into the end of the year and getting ready for an opportunity if it presents itself in the beginning of next year. Tech, which has had a tremendous run, is starting to pull back. I think this is the beginning of a healthy correction that will get focused over the next four to eight weeks as we switch administrations."

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT

“Any kind of selling pressure sort of spirals a little bit out of control when you have a thinly traded market. And I think the selling pressure is really just people looking for direction.”

“It’s not a lot of institutions. I think a lot of non-professionals are looking seeing the market’s direction and they just go with the flow. There’s concerns that maybe the first part of this year can involve some repositioning and reallocation of funds and those that are trading today and next week are probably just trying to get a little bit ahead of that.”

“There’s uncertainty about the direction of interest rates and inflation, and the fact of all this is sort of coming together at one time. What is the Federal Reserve going to do in the first part of next year?”

“And then there’s a new administration coming in with new policies and (there are uncertainties as to) what those policies will actually be, which policies will actually be implemented. There's a lot of talk about new and many changes, but what's really going to happen?”

“And because of the big run that you've had in 2024, portfolios are not exactly positioned correctly for 2025 and I think a lot of people are expecting a lot of changes in the early part of the year.”

“You're seeing some of that today and that will lead to more selling pressure because people just want to capture the gains before they go on into 2025.”

PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA

“This is end of year stuff going on people have had a pretty good year, and it’s typical year-end selling pressure caused by people taking profits, not a lot of buyers out there and not a lot of volume.“

“(There’s) no reason to jump in and buy these things at these valuations, and tax planning is on peoples’ minds this week and will be on Monday and Tuesday. I don't attribute it to, you know, any changing outlook in anything right now.”

“The Santa Claus rally is one of those historic statistics that bears watching, but because of the change in administration and the potential change in policy you're probably seeing more action now than you would ordinarily. There's the potential for a lot of disruption in 2025.”

BRYCE DOTY, SENIOR PORTFOLIO MANAGER, SIT FIXED INCOME ADVISORS, MINNEAPOLIS

"Today the market has really been reacting to the implications of taxes coming up. Tax positioning is overwhelming the other factors. But the more the Fed looks out of touch (with economic realities), the worse it is for equities...Tax trading will continue for the rest of the year."

(Compiled by the Global Finance & Markets Breaking News team)