Tax Management Update – Q3 2023

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The recent market pullback created more opportunities for tax loss harvesting. These were relatively modest, however, given the generally small drawdowns after two quarters of fairly strong returns.

The possibility of a government shutdown dominated fiscal policy discussions, but there have also been some developments related to tax policy as several presidential candidates have started to share their positions with regard to taxes.

Potentially as significant as presidential tax policy platforms, the Moore vs. United States Supreme Court case looms this fall. While the stakes of the actual case are relatively small ($15,000 in taxes are in question), the implications could be far-reaching. Any new precedent established could affect other provisions of the tax code that involve the taxation of unrealized income. Existing taxes on partnerships and pass-through entities, zero-coupon bonds, constructive sales, futures contracts and any other mark-to-market accounting could be impacted.

Equity Market Pullback
The equity markets pulled back a bit in the third quarter after a very strong start during the first six months of the year. The strong performance of a handful of US large cap growth stocks continues to have an outsized effect on the overall large cap index returns. Despite the negative return during the third quarter, the largest single drawdown remains the nearly 8% decline we saw earlier in the year. The second quarter saw two drawdowns of roughly 5% with a modest rebound in between. It is not uncommon to see several drawdowns of this magnitude in any given year.

Annual Total Return and Max Drawdown for the S&P 500^® by Calendar Year
Source: FactSet, Natixis Investment Managers Solutions
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.

Tax Loss Harvesting in Separate Accounts
The market pullback created more opportunities for tax loss harvesting. These were relatively modest, however, given the generally small drawdowns after two quarters of fairly strong returns. The number of stocks in the S&P 500^® posting positive returns for the year dropped from 61% at the end of Q2 to just 50% at the end of Q3.

The concentrated market return has provided a great illustration of the benefits of separate accounts when it comes to tax management and tax loss harvesting. Although the market is up over 13% year to date, half of the index constituents have declined. An investor who bought a commingled vehicle at the beginning of the year would have no unrealized losses to harvest now. But with a separate account, where the client owns all of the individual securities directly, it is likely that half of their portfolio has unrealized losses available to harvest.

To learn more, please read the full Tax Management Update Q3 2023.