Evaluating the Impact of Legislative Stagnation and Year-End Tax-Loss Harvesting
Cannabis stocks have faced a volatile journey over recent years, with companies like AYR Wellness Inc. (AYRWF), Green Thumb Industries Inc. (GTBIF), Trulieve Cannabis Corp. (TCNNF), AdvisorShares Pure US Cannabis ETF (MSOS), and The Cannabist Company Holdings Inc. (CBSTF) seeing sharp declines in value. While these stocks had initially surged on optimism around legalization and the potential for federal reform, they’ve now entered what seems like a prolonged bear market. Investors are left wondering if these stocks have hit rock bottom or if further declines are imminent, especially given ongoing legislative challenges and the potential for year-end tax-loss harvesting.
The market knows that the GOP is fractured on Marijuana, that’s why since Tump’s resounding win, the GOP taking control of the Senate and (most likely the House), weed stocks have taken steep declines.
Peril Ahead – A Legislative Landscape of Stalled Progress
One of the most significant headwinds facing cannabis stocks is the lack of progress on federal legislative reforms. Both the SAFE Banking Act and the MORE Act, which would respectively provide cannabis companies access to banking services and decriminalize cannabis federally, have faced repeated setbacks. While these bills have seen support from various corners of the political spectrum, resistance, particularly from some GOP members, has kept them from advancing.
This delay has maintained an uncertain regulatory environment that is detrimental to cannabis businesses. Without federal banking protections, many cannabis companies are forced to operate on a cash-only basis, making operations more cumbersome and prone to security risks. Additionally, without the decriminalization provided by the MORE Act, cannabis companies face barriers to growth and expansion, impacting both business performance and investor sentiment.
The lack of federal support, particularly from influential GOP members, has cast a shadow on the entire sector. Until substantial legislative reforms pass, the cannabis industry will likely continue to grapple with limitations that hinder its growth potential. This regulatory stagnation raises a critical question: without federal reform, how low can these stocks go?
The “Tax-Loss Harvesting” Factor
As the year comes to a close, tax-loss harvesting becomes another potential driver of downward pressure on cannabis stocks. Tax-loss harvesting is a strategy where investors sell underperforming assets to offset capital gains taxes on other investments. With cannabis stocks experiencing substantial declines this year, many investors may see them as prime candidates for tax-loss harvesting.
This selling pressure at year’s end could exacerbate the already steep declines we’ve seen in the cannabis sector. In essence, tax-loss harvesting could act as a short-term catalyst for further drops, especially in stocks that have shown consistent underperformance.
Investors should be mindful of this trend, as increased selling at the end of the year might lead to a final “capitulation” where prices could reach even lower levels. Capitulation can sometimes signal a market bottom as remaining sellers exit their positions, but given the broader challenges facing the cannabis industry, the downward pressure may continue beyond tax season.
Evaluating the Current State of Cannabis Stocks
The challenges facing cannabis companies are significant and multi-faceted:
- Stock Performance: Cannabis stocks like AYRWF, GTBIF, and TCNNF have seen drastic declines, with year-to-date losses that are hard to ignore. The cannabis-focused MSOS ETF has similarly struggled, reflecting broader sector-wide challenges.
- Market Sentiment: Investor sentiment has soured significantly, with many questioning the viability of cannabis companies in the absence of federal reforms.
- Financial Constraints: Without access to traditional banking services, cannabis companies face higher operational costs and security risks, which eats into their profitability and long-term growth potential.
In the context of these factors, it’s difficult to determine whether cannabis stocks have truly hit bottom or if there is still room for further declines. Legislative reforms could be a game-changer, but without clear timelines or bipartisan support, it remains a waiting game for investors. The risk of continued selling pressure from tax-loss harvesting adds another layer of uncertainty, potentially pushing prices even lower as we approach year-end.
So, Have We Hit Bottom?
The answer may depend on multiple variables beyond the cannabis sector’s control. If federal reforms were to advance in 2025, we could see renewed optimism and a possible recovery. However, without concrete progress, these stocks may continue to languish, further weighed down by tax-loss selling and negative sentiment. In the near term, investors should brace for volatility, with the possibility that the current price levels are not yet the bottom.
Navigating the Market as an Investor
For those who believe in the long-term potential of the cannabis industry, these steep declines could present buying opportunities. However, a cautious approach is warranted, as further declines are possible. Watching for signals of political shifts, especially among GOP lawmakers, could provide insights into when sentiment may shift.
In the end, while the cannabis industry may still hold substantial promise, the immediate future of these stocks remains uncertain. The impact of stalled legislative reform, compounded by tax-loss harvesting and ongoing market challenges, suggests that cautious optimism—and a close eye on market trends—may be the most prudent approach for investors navigating this space.
This should not be considered investment advice. I have owned some of these securities and may choose to buy or sell them at my own discretion.
| Ticker | Company/ETF Name | Closing Price on Nov 5, 2024 | Closing Price on Nov 11, 2024 | Percentage Change |
|---|---|---|---|---|
| AYRWF | Ayr Wellness Inc. | $0.94 | $0.71 | -24.47% |
| GTBIF | Green Thumb Industries Inc. | $10.40 | $8.92 | -14.23% |
| TCNNF | Trulieve Cannabis Corp. | $11.82 | $7.02 | -40.61% |
| MSOS | AdvisorShares Pure US Cannabis ETF | $4.89 | $4.05 | -17.18% |
| CBSTF | The Cannabist Company Holdings Inc. | $0.20 | $0.13 | -35.00% |
| Average Percentage Change: | -26.30% | |||
These figures indicate a significant decline across these cannabis-related securities in the days following the election.