October 26, 2026

U.S. Mutual Funds Close on October 31st: Why Stocks with Losses are Sold in October | 10/25 Money News Commentary

There is one reason why U.S. stocks are sold in October, regardless of performance. U.S. mutual funds must distribute capital gains based on the year ending October 31st, or they will be taxed. If they sell stocks that are currently at a loss before the closing date, they can reduce the amount they need to distribute.

Today’s Agenda

Today is Sunday, and the markets in Tokyo and the U.S. are closed. Today’s deep dive focuses on the tax deadline affecting U.S. stocks next week. Before that, let’s look at the Middle Eastern markets that opened on Sunday. Following the exchange of attacks between the Houthis and Saudi Arabia, both Saudi and Egyptian markets saw significant declines.

Middle East (Sunday): Saudi stocks fell 2.65%, Egypt halted trading for 30 minutes

The Saudi stock index (TASI) closed at 9,438. This is a 2.65% decline from the previous trading day on Thursday the 22nd, and it fell as much as 3.38% at one point.
Petro Rabigh (2380), which operates the refinery that the Houthis claim to have attacked, closed down 4.05%, having been down 7.79% at one point. Aramco (2222) is down 0.87%.
The Egyptian main 30-company index (EGX30) fell 3.56%. The small and mid-cap 70-company index (EGX70 EWI) was down 11.07%.
In Egypt, the 100-company index (EGX100 EWI) dropped 10%. Due to exchange rules, trading across the entire market was halted for 30 minutes (according to Egyptian reports).

The Saudi side announced the interception of missiles and the falling of debris. Neither the Saudi government nor Aramco has confirmed any damage to oil facilities. Before the damage could be verified, the stocks of the companies mentioned were sold off. The facts of the news and the anxiety that the market prices in are two different things.

As of 9:00 PM tonight, there have been no reports of a U.S. attack on Iran. What has been reported are statements from President Trump and reports regarding potential plans.

Friday’s Closing Prices (Recap)

The Nikkei Stock Average closed at 62,693 yen, down 4.03% for the week. The night session futures (December contract) closed at 62,640 yen.
The Dow fell 652 dollars to 52,215 dollars, the S&P 500 was at 7,623, and the Nasdaq Composite was at 25,955.
The yield on the 10-year U.S. Treasury note was 5.00%
The dollar-yen pair closed in New York at 156.86 yen. The currency market is also closed for the weekend.
Brent crude (December contract) was 116.72 dollars, WTI (December contract) was 103.27 dollars, and gold (December contract) was 4,007.9 dollars.
Bitcoin was around 80,470 dollars as of 9:00 PM tonight. It is almost the same as last night.

Weekend News

SoftBank Group is discussing a 50 billion dollar (approximately 7.8 trillion yen) investment in Malaysia. This was revealed in a document of the Prime Minister’s speech released by the Malaysian Prime Minister’s Office on the 24th. The targets are AI and data centers, and it is reported that SoftBank Group’s own investment is only a portion of that (Nikkei).
Europe switches to winter time starting today. The U.S. switches on November 1st. This week, European announcements will be delayed by one hour in Japan time.
Trading of North Sea Brent will resume at 8:00 AM tomorrow, Japan time (ICE). This is when crude oil will first be priced following the events in the Middle East over the weekend.
Both Russia and Ukraine have announced that a local ceasefire in Oleshky, southern Ukraine, will begin on the 27th.

Today’s Deep Dive: US mutual funds close their fiscal year on October 31st.

1. The Rule: Capital gains are calculated for the one-year period ending October 31st.

This is stipulated in Section 4982 of the US tax code (Internal Revenue Code). Mutual funds and similar entities (referred to in the law as “regulated investment companies”) must distribute a set amount to investors each calendar year, or they will be subject to taxes.

Dividends and interest, etc.: 98% of the amount for that year (January–December).
Capital gains from selling stocks, etc.: the one-year period ending October 31st 98.2% of that amount.
If the distributed amount is insufficient, a 4% tax on the shortfall is levied on the mutual fund itself.

Capital gains are calculated by offsetting them against losses incurred from sales. For example, if there is a capital gain of 1 million yen and a capital loss of 400,000 yen, the net is 600,000 yen. The distribution benchmark is 98.2% of that, or 589,200 yen (a simplified example of the mechanism).

The one-year period for capital gains begins on November 1st and ends on October 31st. This year’s period is from November 1st of last year to October 31st of this year. Since October 31st of this year is a Saturday, the final trading day is Friday the 30th.

2. The Mechanism: The higher the gains in a year, the more reason there is to sell losing stocks.

1. When stocks are sold for a profit during the year, the mutual fund distributes that to investors. Distributions usually occur in December. 2. For US investors holding in non-tax-advantaged accounts, the received distribution is subject to tax. 3. If stocks currently at a loss are sold by October 31st, the gains and losses are offset, reducing the distribution amount.

From an investor’s perspective, they may receive a taxable distribution even though they haven’t sold a single share themselves. That is why fund managers have a reason to realize losses before the cutoff date.

3. Research: After tax reform, selling accelerated before October 31st.

Research has confirmed that the selling of losing stocks accelerated before October 31st. A study published in a US finance academic journal in 2000 examined the period following the 1986 tax reform. This reform mandated that mutual fund capital gains be calculated with a cutoff date of October 31st.

After the reform, mutual funds accelerated the sale of stocks that were at a loss before October 31st. This movement was not observed before the reform or among other institutional investors.
In the first year the rule was fully in effect, stocks that mutual funds held in large quantities that had previously declined rose sharply in November. The study calls this the “November Effect.”
Since then, it appears that fund managers have begun to spread out their selling over a longer period, reducing the downward pressure on stock prices.

Once everyone becomes aware of it, the selling is spread out. Even if the rule is known, it does not necessarily mean the same price movement will occur every year.

④ Yardstick: This past year, the difference between stocks that rose and stocks that fell is large

How much did they move over the one-year period ending on the closing date (from last November)? I compared the closing prices on October 31st of last year with the closing prices on the 23rd (Friday) of this year.

S&P 500: 6,840 → 7,623 (+11.5%)
Semiconductor Stock Index (SOX): 7,228 → 10,779 (+49.1%)
Tesla: $456.56 → $372.22 (-18.5%)
Broadcom: $369.63 → $321.68 (-13.0%)

Even within semiconductors, the index is about 1.5 times higher than a year ago, while Broadcom is 13% lower. It has been a year where selling stocks that increased in value would have resulted in large capital gains.

However, whether an investment trust is actually holding losses depends on the purchase price. These figures alone do not tell us which stocks will see selling pressure.

⑤ How to use: Do not attribute next week’s US stock decline to a single reason

Next week (the 26th–30th) is the final week before October 31st.

There are two things to look at.

① Among the stocks that fall next week, which ones are cheaper than they were at the end of last October?
② Will those stocks rebound more strongly than the S&P 500 starting Monday, November 2nd?

Next week also coincides with earnings reports from Microsoft and Alphabet, as well as a US monetary policy meeting (FOMC). Even if they rebound, we cannot definitively say that selling for the closing date was the reason. Verify the numbers that appear to be the cause by looking at when they moved. The idea is to use the closing date sell-off as one of the potential candidates to keep in mind.

There are also limitations.

The scale of selling before the closing date varies by year. Research has also shown that, over time, selling has become more distributed.
Investment trusts that close their fiscal year in November or December can, if they file, count based on their own fiscal year rather than October 31st.
Japanese investment trusts and individual Japanese accounts are not subject to these US rules.

Even so, you can avoid jumping to the conclusion that ‘October declines = bad news’.

Today’s yardstick: Egyptian stocks on the same day, can be 3.6% lower or 11% lower

In today’s Egyptian market, the extent of the decline varied significantly depending on which index you looked at.

1. Major 30-company index (EGX30): down 3.56%
2. Small and mid-cap 70-company index (EGX70 EWI): down 11.07%
3. Trigger for trading halt: 10% drop in the 100-company index (EGX100 EWI)

The EGX30 weights companies more heavily the larger their market capitalization. The EGX70 EWI is an index that counts the 70 companies excluding the top 30 with equal weight (EWI stands for ‘Equal Weight Index’). Not only are the companies different, but the method of calculation is also different.

Looking at it by the weight of large companies, it was a 3.6% drop. Looking at small and mid-sized companies one by one with equal weight, it was an 11% drop for the day. First, check which index the ‘% drop’ in the headline refers to. Even in Japan, the view of the same day changes depending on the Nikkei 225, TOPIX, and the number of declining stocks.

There are also limitations. Small and mid-cap stocks are more prone to price movement the lower their trading volume. The difference in indices only reflects the difference in how they are being sold, and does not distinguish the reasons why they were sold.

Points to watch from now on

Tomorrow (Monday, the 26th)

8:00 Trading of Brent Crude resumes (ICE)
14:00 August Business Conditions Index (revised)
18:00 Germany’s October Business Climate Index (Ifo)
Chinese Communist Party meeting (Fifth Plenary Session, until the 29th)

This week

10/27 (Tue) First day of FOMC. Israeli general election. Margin trading balance as of the 23rd (JPX)
10/28 (Wed) Earnings: Microsoft, Alphabet, SK Hynix; in Japan: Advantest, Hitachi. Last day with rights for the end of October
10/29 (Thu) 3:00 FOMC results, 3:30 Chair’s press conference. 21:30 US Q3 GDP (preliminary) and September Personal Consumption Expenditures. 22:15 European Central Bank (ECB) policy interest rate. Earnings: Samsung Electronics. Bank of Japan Monetary Policy Meeting (until the 30th)
10/30 (Fri) 8:30 Tokyo Metropolitan Area Consumer Price Index (October). BOJ decision and Outlook Report. Earnings: Tokyo Electron, Kioxia. Amazon and Intel are on the morning of the 30th Japan time. Last trading day of the ‘one-year capital gains’ for US mutual funds
10/31 (Sat) Closing date for the ‘one-year capital gains’ of US mutual funds

Beyond that

11/1 (Sun) US switches to winter time
11/2 (Mon) Apple earnings (scheduled)
11/3 (Tue) US midterm elections
11/6 (Fri) US October Employment Statistics

Today’s Glossary

Capital Gains
Profit made by selling stocks or other assets for more than the purchase price. A rise in stock price alone does not result in a capital gain until it is sold (that is an unrealized gain).

Regulated Investment Company
A term in US tax law referring to mutual funds and similar entities that meet specific conditions.

November Effect (as defined in today’s research)
The movement where stocks sold off by October rise in November after the closing date has passed. This does not necessarily happen every year.

It is beneficial to follow. You will receive daily interpretations of money news and their follow-ups on your timeline. We will verify the continuation of today’s “October 31st closing” by observing how stocks that fell next week move in November.

Sources of the figures: The rules for US mutual fund distributions are based on Section 4982 of the US Internal Revenue Code (Cornell Law School’s Legal Information Institute page) and guidance from the Internal Revenue Service (IRS). The research is a summary of the paper “Tax-Motivated Trading and Price Pressure” published in the Journal of Financial and Quantitative Analysis in 2000. Distribution timing is based on commentary from Russell Investments. US stock indices and individual stocks, Saudi and Egyptian indices and individual stocks, crude oil and gold futures, Bitcoin, and the dollar-yen rate are from Yahoo Finance and Kabutan. US Treasury yields are from the US Department of the Treasury. Information on the Egyptian index and trading halts is based on Egyptian news reports citing exchange data and the exchange’s 2020 announcements. Middle East affairs are based on domestic and international news. SoftBank Group information is from the Nihon Keizai Shimbun. Winter time is based on EU regulations, and Brent reopening times are from ICE. Schedules are from each central bank, each company, JPX, and Kabutan. Division is my own calculation using published figures.

When you see an “October decline,” first check whether that stock has risen or fallen over the past year.
Please use the same yardstick to verify the rebound after entering November.

Aika

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