Adding to a selloff which has accelerated ever since Jerome Powell announced policymakers will continue to tighten the monetary system even if it means job losses and entering a recession, it now appears that as much as $100 billion in stocks are set to be unloaded by the world’s biggest money managers in the final few weeks of the year.
As equities have gained this quarter, their increasing value relative to other asset classes has forced managers with strict allocation mandates to offload them in order to meet targets. According to JPMorgan Chase & Co and StoneX Financial Inc, it can be expected that bonds will be the likely beneficiaries, as sovereign wealth funds, pension funds, and balanced mutual funds all seek to increase their fixed income holdings.
JPMorgan goes on to note it is expected that by the end of December, sovereign wealth funds could have sold $29 billion in equities, as US defined pension plans move as much as $70 billion out of equities and into bonds to reach long-term targets and return them to September levels.
Typically, sovereign wealth and pension funds will rebalance market exposures each quarter, with an eye to reaching a mix of 40% bonds, and 60% stocks.
Vincent Deluard, a macro strategist at StoneX said, “The recent equity market correction and bond rally is consistent with the rebalancing hypothesis.”
He believes the rebalancing has already begun, noting that this week, “Investors had to sell stocks and buy bonds to get back to target. It makes sense for this to continue until the end of the year.”
As these funds shift out of equities, that will add to an expected $30 billion in forced sales produced by trend-following quantitative analysts riding the S&P 500 down, following the already 6% it has lost from its November high.
After Fed Chair Jerome Powell announced interest rates were going to remain elevated following the end of the Fed’s final 2022 meeting, and analysts came to terms with the fact there would be no drawdown on rates, and the peak rate had even increased, JPMorgan predicted that Japan’s $1.6 trillion GPIF, the largest pension fund in the world, would need to offload $17 billion in equities in order to reach its target asset allocation. Meanwhile it appears the $1.3 trillion Norwegian Oil Fund could end up moving $12 billion out of stocks and into bonds.
