- According to JPMorgan, there’s a potential $300 billion headwind that could weigh on global stocks into year-end: portfolio rebalancing.
- The fourth quarter rally in stocks would likely trigger the balanced mutual fund universe to sell stocks and buy bonds as they rebalance to their 60/40 stock and bond target allocation.
- $160 billion in stocks are likely subject to being sold by the end of this year, and an additional $150 billion could be sold if the stock market continues to rally into December, JPMorgan said.
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Global stocks face a potential $300 billion headwind heading into year-end: portfolio rebalancing.
That’s according to a Friday note from JPMorgan, which argued that the strong rally in stocks in the fourth quarter will trigger $160 billion in equity outflows as balanced mutual funds sell stocks and buy bonds to get back to their target allocation of 60% stocks and 40% bonds.
And if stocks continue to rally into December, that would likely trigger an additional $150 billion in stock selling by pension funds that tend to rebalance on a quarterly basis, according to the note.
JPMorgan based its calculations off of quarter and month-to-date performance, and assumed that the balanced mutual funds were fully rebalanced at its target allocation at the end of October, rather than being underweight stocks.
The targeted portfolios included in JPMorgan’s analysis include balanced mutual funds and US defined benefit pension plans. Balanced mutual funds alone represent a $7 trillion universe, according to JPMorgan.
“There would be some vulnerability in equity markets in the near term from balanced mutual funds having to sell equities to revert to their 60/40 equity/bond target allocation, either by the end of November or by the end of December at the latest,” JPMorgan said.