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Nov. 30, 2020, 11:45 a.m. EST

These ‘whales’ could stand in the way of a year-end rally for stocks, warns strategist

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By Barbara Kollmeyer

November is set to be the best month since 1987 for the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.12% . Those big gains have come as investors have cheered vaccine news and dissipating U.S. postelection stress.

But our call of the day is tempering enthusiasm for the weeks ahead, citing portfolio rebalancing by the whales of the massive, target-date fund industry.

“Target-date funds must rebalance against the market. So if stocks go up and treasuries go down, as has been the case so far this quarter, they will need to sell stocks and buy bonds to get back to their target weights by the end of the quarter.” Vincent Deluard, global macro strategist at financial services group StoneX, formerly INTL FCStone, told MarketWatch in emailed comments.

Also known as life-cycle funds, those funds automatically rebalance with a mix of suitable stocks, bonds and other assets as the investor ages. They tend to grow more conservative the closer to the target or retirement date of the investor.

He pointed out in a September flow note that that industry “collects 5 to 10% of most Americans’ paychecks” and “invests them formulaically into a handful of low-cost index funds with assets of $2.3 trillion.” So when those funds rebalance it “must result in whale-like trading flow, which can rock markets,” he added.

Big target-fund provider Vanguard’s “four equity whales” alone scooped up $43 billion during the first quarter COVID-19 bear market and $23 billion during the “Christmas massacre of 2018,” he noted.

So any rebalancing may coincide with what has traditionally been a strong period for stocks — officially the last five days of December and first couple of January. “The Santa Claus rally is one of the strongest seasonal anomalies so a selloff would come as a surprise, statistically speaking,” Deluard said.

“Many other factors drive markets, but target-date rebalancing flows are huge, liquidity has been trending lower for decades, and is seasonally low around the holidays so flows can have a disproportionate impact on price,” he added.

Also warning of a possible rebalancing hit ahead for stocks were JP Morgan strategists Nikolaos Panigirtzoglou and Mika Inkinen in a Nov. 20 note.

“We see some vulnerability in equity markets in the near term from balanced mutual funds, a $7 trillion universe, having to sell around $160 billion of equities globally to revert to their target 60:40 allocation either by the end of November or by the end of December at the latest,” said the pair.

They said a continuation of the stock rally into December would trigger the need for another $150 billion of equity selling into the end of December by pension funds.

The quote

“On such matters, they would never protest; they are incapable of moving outside of their own little world of interests.” — That was Pope Francis taking aim at anti-mask protesters in his coming new book .

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