EDITOR'S NOTE
There's been a lot of talk about how much money might flood into the stock market this week thanks to quarterly "rebalancing." Turns out, that was slight case of April Fool's.
Investors were hoping big inflows might help stabilize stocks after the Dow had its worst Jan-March performance ever, down almost 20%. Instead, volume has been pretty light in recent days. Brian Reynolds of his eponymous research firm chalks this up to big pensions not rebalancing into stocks, as was widely expected.
Here's how rebalancing typically works, for anyone from individual investors to the country's largest pension funds: say the investor aims for 45% of its assets in stocks. When stock values drop 20%, the fund is left with only 36% of its money (roughly speaking, since the other assets are moving in value as well) in stocks. Therefore, it has to buy more equities to get the allocation back up to target.
You can imagine, when all the biggest pension investors are dealing with the same dynamic, how that could generate massive stock market inflows. But not this time. Why? "Such a move makes no sense for pensions given the capital calls they are facing from credit and related products," says Reynolds. "We believe a significant number of pensions postponed their rebalance for at least six months, and for longer if financial conditions have not improved." That is likely to weigh on the market for the time being.
The good news is that by not adding majorly to their equity positions right now, pension funds will be less likely to be forced to sell them in a panic later on. This would be a major lesson they learned from 2008, and could help avoid worsening a future sell-off.
The not-so-good news is that Reynolds and others are increasingly concerned about the condition of financial markets. His hope is that pension funds and the Fed are making moves now that will prevent this from morphing into the later stages of the '08-09 credit crisis. But he notes the similarities, including a surge in bank assets and liabilities as companies draw on their credit lines, between now and the post-Bear Stearns environment.
David Zervos of Jefferies yesterday also sounded somewhat dejected in his client note. "The totality of deficit spending and Fed balance sheet expansion will be at least 40% of GDP," he wrote, "and probably far more, before all is said and done. Only those rare souls who can recall markets of the 1940s will have seen anything like what has just been implemented by the U.S. government."
"The fact that these extremely aggressive measures were thrown into the economy, and we are still trading down ~20% year-to-date, is more than a little sad," Zervos wrote. "Thus, what is coming around the corner for this economy is likely to be quite nasty."
Ugh.
So let me leave it on a slightly more hopeful note, courtesy of the late Georges Bernanos. "One doesn't submit to the future; one makes it."
See you at 1 p.m!
Kelly
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Rabu, 01 April 2020
Not so great news for the stock market
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