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Weekly Insights
Volume 12, Edition 11 | April 17 – April 21, 2023

Taxes Are a Good Problem to Have

Doug Walters, CFA
Nobody likes to pay the IRS, but incurring taxable gains is often essential in managing portfolio risk and maximizing returns. Taxes on investment gains are a good problem to have.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

With stocks back in positive territory this year, capital gains are once again accruing. It is an excellent time to think about how to successfully think about and manage these gains for the long term.

Generally speaking, gains are good. It means the investments you own went up in value. That is the goal of investing! When gains are “realized” through the sale of a security, like a fund or stock, those gains can be taxable. We are not going to talk about the intricacies of taxability here. Instead, we are going to focus on the psychology of gains.

Capital gains taxes can range from 0% to 20% for long-term gains (on securities held for more than a year) and more for short-term gains. We often see this tax cause mental friction for investors. Nobody likes to pay taxes, and understandably there is a reluctance to take any action that will result in a tax bill.

The problem with gain avoidance is twofold:

  • You surrender your ability to sell high and buy low. Successful investors know when to call in their bets and sell their winners to buy a new investment with more potential upside. They are more than willing to pay the tax collector to pursue their best ideas.
  • You lose control of your portfolio risk. If you never sell your winners, they can grow too large in your portfolio and create concentration risk. In addition, your portfolio will stray from your target risk allocation over time. Rebalancing a portfolio back to target allocation regularly is vital for risk management. It also helps you systematically sell high and buy low. But you cannot do this without taking gains.

Taxes are an inevitable part of successful investing. Generally, long-term investors should not shy away from realizing capital gains today, knowing that gains taken today help manage risk and open up new opportunities for upside (also, don’t forget that taxes incurred today can reduce the tax burden later in life).

Everyone’s situation is unique, and taxes are complicated, so it is best to seek expert advice. But the calculus is much more nuanced than just trying to minimize your current tax bill.


The Manufacturing PMI beat expectations and was the highest its been since October.

Headline of the Week

Purchasing Takes Off

US stocks ended the week near where they started. A welcome calm in the aftermath of the mini-banking crisis, which seems a distant memory ever since the Fed launched its Bank Term Funding Program. Most of the excitement was up in space (or at least part way up to space), but the Purchasing Manager’s Index (PMI) did manage to raise some eyebrows.

Friday’s Markit PMI came in above expectations. The Services index rang in at 53.7, well above the 52.3 expected. Above 50 implies growth. Services have remained strong despite the efforts of the Fed to pump the brakes. But perhaps it was the Manufacturing index that was more surprising. A reading of 50.4 beat expectations of 49.3 and is in growth territory (above 50) for the first time since October 2022.

This is a mixed blessing. On the one hand, it might suggest that the economic landing from the Fed’s rate increases might be soft. On the other hand, overheated economic expansion could feed inflation, causing the Fed to initiate a “rapid unscheduled disassembly” of the growth drivers.

The Week Ahead

This upcoming week is the biggest week of earnings season, but Gross Domestic Product and inflation reports could take center stage.

Inflated Expectations

Next week’s Personal Consumption Expenditures Index (PCE) will be the last inflation report before the May meeting of the Federal Reserve.

  • Current expectations are for a little more moderation in the inflation numbers, with core-PCE coming in at 4.5% year-over-year in March.
  • Markets have a ¼ of a percent hike as a near certainty at the May meeting. However, this inflation report will be the proxy for the pause button.
  • If inflation does not simmer down, especially after all the bank-related turmoil in March, the Fed may not have the leeway to stop hiking at its next meeting.


Gross Domestic Product (GDP) covering the first quarter of 2023 will be released in Europe and at home next week.

  • These will be preliminary numbers and will face several revisions before the final answer is locked in.
  • While the results in Europe will most likely show the continent eked out a small expansion, it will not quell concerns that the next quarter will go negative.
  • However, a stronger-than-expected expansion will provide more ammo to the European Central Bank to hike rates by ½ of a percent.
  • Germany on its own may produce a contraction in the quarter, as it did last quarter.
  • Domestically, economists predict the US economy expanded by a 2% annualized rate in the first quarter. This is a slower expansion than the 2.6% in the last quarter of 2022.
  • This preliminary result will fail to reflect the damage from tightening lending conditions due to bank failures, which will come into play in the next revision(s).

Under New Management

The Bank of Japan (BOJ) is set to have a rate decision Friday. This will be the first under new governor Kazuo Ueda.

  • The Japanese Yen weakened against the dollar in March, which should buy more time for Ueda before he must tweak the yield controls and reverse his predecessor’s loose monetary policy.
  • Inflation in March cooled, so the urgency to tighten policy seems to have receded.

Technically Speaking

Earnings season is in full swing, with banks taking center stage in the early innings, but next week will be the most critical week of earnings as a diversified basket of bellwethers report.

  • Mid-week, we will get results from Microsoft (MSFT), Alphabet (GOOG, GOOGL), Meta Platforms (META), and Amazon (AMZN).
  • Other Notable releases include Coke (KO), PepsiCo (PEP), Visa (V), Mastercard (MA), Boeing (BA), McDonalds (MCD), Merck (MRK), Colgate-Palmolive (CL), Chevron (CVX) and Exxon (XOM).

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