Lately, when the stock market indices fall like it did yesterday, we are told that it is because of the omicron variant. While covid-sensitive areas of the market such as airlines and cruise stocks did fall, yesterday’s drop was led by tech stocks that have so far been resilient to these recent declines. That hints at something else going on, and the story of Tesla (TSLA) founder and self-appointed "technoking" Elon Musk may well tell us what that something is.
Musk has been selling stock in his company, in large part because he has what is the ultimate first world problem: In 2012, he was granted some stock options that expire next summer, and the amazing performance of TSLA over the last decade means that when they do, he will face a massive tax bill. He is aiming to sell around 10% of his Tesla stock, in part to pay that bill. The sales have two advantages: they raise money to pay his taxes, and also pushes the price of its stock down, reducing his tax exposure somewhat.
Obviously, selling some stock makes sense for Musk in that scenario, as does adding to the tax-related sales to pocket some cash. The consistent selling that comes from that amount of stock hitting the market was always going to push the price down, so why not cash some out as you are doing it, especially when you know you have options that will exercise in a few months? Making too much money is always a good problem to have.
Musk’s actions have been well-reported, as is most of what he does, but he is not the only one cashing out and getting ready for a big tax bill.
CEOs and founders at Amazon (AMZN), Microsoft (MSFT), Walmart (WMT), Alphabet (GOOG, GOOGL) and Meta (FB) have all sold billions of dollars’ worth of stock recently. Now, one could argue that that is a bad sign, indicating that the ultra-wealthy think their stocks have topped out, but that probably isn’t what’s going on here. Stocks in those companies have shown such massive long-term gains, with those gains accelerating this year, that cashing out a percentage of a big holding as the year ends is just plain sensible. It also makes sense if they expect the stock to gain 20% over the next couple of years, bringing the value of their holdings back up, especially if they think stocks are a little overvalued at this point.
What small investors should keep in mind as they watch the market drop is that Musk, Bezos, and the others aren’t the only ones looking at large, recently accelerated long-term gains. Almost every big fund and even some individual investors are in the same boat, which is making for larger-than-normal year-end selling pressure.
Not all of it is tax related. Some of it is motivated by bookkeeping and the desire to take some cash before closing the books for the year, but whatever the motivation, year-end selling at close to record highs shouldn’t come as a major surprise.
Nor is it just the ultra-wealthy selling for tax reasons. We hear all the time that there is a shift towards contract working and the gig economy, and that also has an impact. If you don’t typically pay federal tax until the end of the year, investing your tax savings this year has shown great returns. However, you have to liquidate before the bill comes due so, once again, there is selling that is not related to future prospects for the economy or the market.
That isn’t to say that there aren’t reasons to be a bit concerned about the markets next year. I have been saying for a long time that no matter what was in the headlines at any given time, as long as the Fed kept injecting liquidity and kept interest rates at historic lows, stocks were underpinned to such a degree that they couldn’t help but go up. Jay Powell has now clearly signaled that they are going to attempt to change those policies.
Right now, the Fed is still buying assets, albeit at a reduced rate, and rate hikes probably won’t come until the middle of next year. Even then, increases are targeted to be in 25 basis point increments, which the market should be able to take in stride easily, given that the starting point is zero. This is no sudden, shocking change of direction, since the Fed has been very careful to overcommunicate its future plans. If it all pans out as Powell expects, then the Fed's moves will be an orderly retreat from supporting what is an inherently strong economy.
When we see selling at the end of the year, it isn’t necessarily about today’s headlines, nor does it tell us anything about what to expect next year. It is in part seasonal and in some cases personal, and is a consequence of a great year for the market. In that respect, as we watch stocks that are up 25% on the year give back a couple of points, rather than be fearful, we should probably be thankful.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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