There are calendar trends like “Sell in May and go away” and the “January Effect” when the stock market tends to either outperform or underperform. Markets generally perform well in the two weeks following Tax Day, which is incidentally today.
Tax Day is thus a seasonal buying opportunity, with some sectors traditionally performing well.
A Special Day for the Stock Market
During 1913, Tax Day or the filing of income tax deadline was fixed on Mar 1. It was shifted to Mar 15 in 1918. Again, it was moved to Apr 15 in 1955. However, if the date falls on a Saturday or Sunday, the filing of federal income tax returns is pushed to the next business day.
This year, the last day to file taxes is Apr 15, as it is a Monday. This bodes well for Wall Street as analysts have found out that nearly 15% to 33% of all tax filers wait for the very last date to fund their IRAs. Thus, additional cash flows into the equity market. After all, IRAs include an array of asset classes like stocks in which individuals invest for retirement.
The broader S&P 500 on average gained 0.3% on the Tax Day over the past 10 years. Skeptics may say 0.3% isn’t much of a gain, but, it is around 7 points on the index, equating to an annualized gain of about 75% over the average 252 trading days in a year. Now, that’s a lot.
End of Tax Season Brings Seasonal Investing Opportunity
We should keep in mind that the stock market tends to gain in the two weeks following the Tax Day, with several sectors rallying remarkably.
According to data analytics firm Kensho, since 2000, the S&P 500 has been up 1.7% on average during the two weeks following the Tax Day. And among the several sectors that have seen notable moves are technology, financials and industrials, gaining around 3%, 1.7% and 2.2%, respectively.
Optimism surrounding the U.S.-China trade deal coupled with Fed’s indication to hold interest rates steady this year has lifted tech stocks. Adding to the optimism is industry rationalization and a slew of new technological trends like IoT, high-end gaming and 5G wireless. At the same time, reports of smartphone market recovery are taking chip stocks higher.
The tax overhaul, in the meantime, has been a boon for financials, especially banks. The reduction in corporate tax rates to 21% from 35% helped banks’ bottom line grow significantly. In fact, banking behemoths collectively reaped more than $9 billion from the tax cut policy during the first nine months of 2018, per the Wall Street Journal.
JPMorgan Chase CEO Jamie Dimon also recently informed investors that bank profits got a big boost last year from corporate tax cuts. And it is widely expected that tax cuts will continue to boost bank earnings this quarter.
And when it comes to industrials, American manufacturing rebounded last month after taking a beating in the prior month. According to the ISM, its manufacturing index came in at 55.3% last month compared with 54.2% in February.
However, the latest reading can be termed as normal growth rather than unusually strong growth. After all, the 12-month average is still at the lowest since May 2017. Nonetheless, employment rebounded strongly, indicating that the manufacturing index’s comeback has been primarily backed by domestically-focused activities. At the same time, 16 of the 18 U.S. manufacturing industries surveyed by ISM expanded in March.
Gain From Tax Season With These 5 Solid Stocks
Given that the aforesaid sectors are positioned to make the most of the upcoming bullish trend, investing in stocks from the same will be prudent. We have, thus, selected five stocks that are fundamentally sound. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Arista Networks, Inc. ANET develops, markets and sells cloud networking solutions. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has increased 1.5% in the past 60 days. The company’s expected earnings growth for the current year is 16.3%, in contrast to the Communication - Components industry’s projected decline of 2.4%.
Cisco Systems, Inc. CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 1.3% in the past 90 days. The company’s expected earnings growth for the current year is 17.7%, in contrast to the Computer - Networking industry’s estimated decline of 0.4%.
First BanCorp. FBP provides a range of financial products and services to retail, commercial, and institutional clients. The company operates in six segments: Commercial and Corporate Banking, Consumer (Retail) Banking, Mortgage Banking, Treasury and Investments, United States Operations, and Virgin Islands Operations. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 4.1% in the past 60 days. The company’s expected earnings growth for the current year is 24.2%, higher than the Banks - Southeast industry’s projected rise of 8.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Encore Wire Corporation WIRE manufactures and sells electrical building wires and cables for interior electrical wiring. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has moved up 22.7% in the past 60 days. The company’s expected earnings growth for the current year is almost 7%, more than the Wire and Cable Products industry’s projected rise of 4.4%.
DXP Enterprises, Inc. DXPE engages in distributing maintenance, repair, and operating (MRO) products, equipment, and services to industrial customers. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has increased 5.8% in the past 60 days. The company’s expected earnings growth for the current year is 21.7%, more than the Manufacturing - General Industrial industry’s projected growth of 15.9%.
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