Earlier today we laid out two traders views, one bull and one bear, both of which agreed that the next leg in stocks will be higher, and laid out their reasons. Now a third potential catalyst for a major month-end rally has emerged: according to Goldman trading desk estimates, there is a net $30 billion of US equities to buy from US pensions given the moves in equities and bonds over the month and quarter.
How does this stack up vs history? This ranks in the 72nd percentile amongst all buy and sell estimates in absolute dollar value over the past three years and in the 92nd percentile going back to Jan 2000. Additionally, the buying imbalance also ranks in the 94th percentile amongst all estimates on a net basis (-$70bn to +$150bn scale) over the past three years and in the 96th percentile going back to Jan 2000.
JPMorgan's Marko Kolanovic - Wall Street's biggest permabull bar none and nothing: he has told clients to the dip every single week this year, prompting many to ask just how much money to lose do JPM's clients have - naturally agreed with this bullish take and in a Friday note co-written with Bram Kaplan writes that the month- and quarter-end rebalance could push stocks 7% higher, driving the S&P well above 4,000 in the process. Some excerpts from the note:
This year the impact of rebalances have been significant due to large market moves and low liquidity. For instance, near the end of the first quarter, the market was down ~10%, and experienced a significant ~7% rally in the last week going into quarter-end. On the most recent monthly rebalance, near the end of May, the market was down 10%, and experienced a significant rally of ~7% going into month end.
Let’s look at the current rebalance setup. Broad equities are down 21% for the year (9% vs bonds), 16% for the quarter (11% vs bonds), and 9% for the month (7% vs bonds).
In summary, Kolanovic finds that "rebalances across all 3 lookback windows would reinforce and, based on historical regression, would imply a ~7% move up in equities next week" Of course, having been wrong in 2022 with his relentless calls to BTFD, Kolanovic hedges somewhat and says that this assessment "takes into account the current market liquidity, as measured by futures market depth, which is ~5 times lower than the historical average."
The Croat also hedges that rebalances are not the only drivers and the estimated move is assuming ‘all else equal’ (which of course never is). At the same time, bonds would feel moderate downward pressure from rebalances and the increase of yields could further result in rotation towards cyclical equities (and away from defensives). Or it could just lead to another bout of broad-based selling.
Naturally, pension buying of stocks means pension selling of bonds, and a note from Deutsche Bank's Steve Zeng (also available to pro subs) predicts just that.
Writing that given a current snapshot of a 19% dive in the S&P 500 and mere 6% “slide” in the aggregate bond index, DB's static-weight model estimates $85bn of selling in fixed income by public and private pensions this quarter.
How accurate is DB's pension reallocation model? Pretty accurate, as it turns out: as Zeng explains, "In Q1, our model had estimated $88bn of fixed income buying by the pension community. Actual inflows were $53bn, with $47bn of those coming from public pensions. (Private pensions met $6.5bn of the $38bn predicted for them.)"
The DB strategist also notes that pension rebalancing flows could contribute further weakness to long-end rates, which has already been battered by bad inflation reports and a hawkish Fed. As such "a short-term tactical steepener in 5s/30s could make sense, especially if one holds the view that data over the next two weeks might land on the soft side. Fed officials may also try to sound a more dovish tone after this week's hawkish central bank surprises. 5s/30s (and 10s/30s) generally move in the opposite direction of rates."
Bottom line: pensions are clearly set to lift stock offers into month-end (and beyond), and odds are that we will see further technical and positional bullish moves in the coming days.
More in the full notes available to pro subs.