END OF YEAR INVESTMENTS – year-end trading specifics

The end of the year is a time when the economy and financial markets go through unique seasonal changes. This period is accompanied by phenomena such as increased consumer spending, tax planning and massive company reporting. All of these factors create special dynamics that interest investors and traders alike. In today’s Strifor review, we will break down the key economic, investment and trading features that characterize the end of the year and explain what opportunities and risks they may bring.

General trends

Consumer spending. One of the main factors affecting the economy in this period is the growth of consumer spending amid preparations for the holidays. According to analysts, in many countries retail sales in December grow by 20-30% compared to the previous months, which has a positive impact on GDP. In the U.S. and European countries, for example, active holiday shopping helps support the retail sector and stimulates the growth of the durable goods market.

Company behavior. The end of the year is also important for companies themselves, as many companies finalize their financial reports and adjust their inventories, especially in industries where turnover is seasonal. For example, apparel or appliance manufacturers may either increase or decrease inventories depending on next year’s forecasts, which also affects the economics and investment attractiveness of the industry.

Tax issues. For businesses and individuals, the end of the year is a time for tax optimization. Different countries have strategies in place to reduce the tax burden, such as moving expenses to the current year or, conversely, deferring income to the next year. For example, companies may accelerate equipment write-offs or invest in R&D to reduce the tax base. Such steps can affect corporate performance and even overall economic activity.

Specifics of investments at the end of the year

Portfolio adjustments. The end of the year is often perceived as a good time to review a portfolio. Investors can balance assets by evaluating their successes over the year and adjusting strategies to the economic outlook for the coming year. For example, if a portfolio is highly diversified, one might consider which sectors have been the best performers and which should be reallocated.

Selling assets for tax purposes. The principle of “selling for a loss” is popular at the end of the year among private investors. It allows capital gains from successful trades to be offset by reducing taxes. For example, in the U.S., selling unprofitable shares before the close of the tax year can significantly reduce the tax burden. At the same time, such sales temporarily increase liquidity in the market, creating favorable opportunities for buyers.

Sector trends. Some sectors traditionally become more active at the end of the year. Retail and home goods, for example, experience a sales boom in December, and technology companies tend to release financial reports that attract the attention of analysts and investors. This can affect share prices, especially if the results meet or fall short of expectations.

Specifics of trading at the end of the year

Market volatility. Reduced trading volumes at the end of the year and high activity around popular stocks can increase volatility. For example, during the holidays, large institutional players may suspend activity, making markets more susceptible to fluctuations. For traders, this opens up both opportunities for quick gains and risks of losses.

The December effect. In December, there is the phenomenon of the “Santa Claus rally” – the tendency for the stock market to rise in the last few days of the year. This is partly due to psychology and massive year-end stock purchases, but may also reflect a favorable news backdrop created by corporate reports. Nevertheless, this is not always a guaranteed occurrence and the market can behave unpredictably.

Institutional investor activity. Institutional investors may begin to adjust their portfolios before the annual report, which may affect stock prices. For example, funds may get rid of stocks that have been less profitable and emphasize more stable assets, which affects prices.

Macroeconomic and global influences

Central bank actions. The end of the year is often accompanied by announcements by central banks about interest rates and forecasts for the next year. For example, the US Federal Reserve and the ECB may announce possible changes, influencing market expectations. Traders and investors usually follow these announcements closely to gauge potential fluctuations in currencies and stocks.

International Trade. Foreign economic activity also plays a role. Before the new year, countries often adjust export and import transactions. For example, if a company in the European Union is planning shipments to the U.S., currency fluctuations could affect its earnings and, as a result, its stock price.

Currency fluctuations. Holiday travel and repatriation of profits can affect exchange rates. For example, traditional vacations in China or Southeast Asian countries can temporarily strengthen or weaken currencies, which is important to consider in international trade and currency speculation.

Unique opportunities and risks

Positioning for next year. Some investors view the end of the year as a chance to invest in assets that may be promising next year. For example, regulatory changes or projected government investments could spur demand for certain companies or industries, such as green technology or the medical sector.

Regulatory changes. A new year often brings regulatory updates. Investors aware of such changes can adjust their strategies and buy or sell assets in advance.

Overbought risks. If the market picks up at the end of the year, it can lead to short-term price bubbles that correct early next year. For example, stocks that rose on massive buying in December may lose value in January when demand slows.

Impact of the heating season

The end of the year is not only winter vacations and vacations, but also the cooling season, which is no less important for commodity traders.

Increased demand for energy resources. With the onset of cold weather, energy consumption increases, especially in countries with harsh winters. This leads to higher oil and gas prices as demand for heating and electricity increases. For example, during cold winters, the price of oil can rise by 10-15%, which in turn affects the share prices of energy companies. Traders can take this seasonal factor into account to forecast short-term changes in the energy market.

Changes in logistics costs. Poor weather conditions during winter lead to higher transportation costs, which affects companies that deliver goods and raw materials. Higher logistics costs can affect the performance of companies involved in retail and manufacturing. For example, bad weather conditions can slow deliveries and increase transportation costs, especially for companies operating in northern regions.

Seasonal changes in consumer preferences. Colder weather stimulates demand for certain products, such as winter clothing, heating equipment and cars with improved conditions for winter travel. Companies that offer cold weather products tend to perform well toward the end of the year, which can increase their attractiveness to investors.

Incorporating seasonal factors, such as colder weather, into the analysis can help traders and investors more accurately assess end-of-year market conditions and adjust their strategies accordingly.

To summarize 

The end of the year is a time of unique opportunities and challenges for all financial market participants. From tax planning and portfolio review to analyzing central bank actions and seasonal fluctuations, it is important for every investor and trader to consider these features to successfully end the year and prepare for the new one. 

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