By Joseph Adinolfi
While stock-market strategists at Bank of America and Morgan Stanley grow increasingly bearish, JPMorgan’s equity-research department has churned up yet another bullish note for the bank’s clients, advising them about the potential for massive month- and quarter-end rebalancing flows that could trigger a sustained rebound in stocks, putting even more distance between the U.S. benchmarks and the bear-market territory with which the S&P 500 index was flirting late last week.
The team of JPMorgan equity quants, led by Nikolaos Panigirtzoglou, told the bank’s clients that potentially more than $250 billion could flow into stocks by the end of June as American mutual funds and pension funds, along with foreign pensions and sovereign-wealth funds, “rebalance” by buying stocks and selling bonds to compensate for the latest drop in stocks.
In their latest report on equity flows and liquidity, the team said it expects between $34 billion and $56 billion of buying by “balanced” mutual funds (that is, funds that aim to maintain a 60/40 weighting of stocks to bonds in accordance with the principles of Modern Portfolio Theory).
But even larger than the mutual-fund universe is the world of defined-benefit pension funds, which Panigirtzoglou and his team believe could dump as much as $167 billion into U.S. stocks by the end of June.
These funds have an aggregate $7.5 trillion in assets under management, according to JPMorgan, and although pension funds tend to rebalance more slowly than mutual funds, the JPMorgan team suspects that they might be behind the eight-ball on rebalancing for April, leaving more room for buying as we head into the summer months.
Finally, the JPMorgan analysts expect an additional $40 billion of inflows from major foreign buyers like the Norges Bank (which controls Norway’s massive sovereign-wealth fund), the Swiss National Bank (which maintains a large portfolio of U.S. equities) and Japanese pension funds.
All told, that’s potentially more than $250 billion in inflows that could bolster Wall Street stocks. Since algorithmic traders like Commodity Trading Advisors often trade based on momentum, the initial move higher in equities caused by these inflows could potentially trigger a virtuous feedback loop that could see stocks erase more than half of their year-to-date losses — at least, according to JPMorgan.
To be sure, the JPMorgan team had expected a significant bump in equity prices due to rebalancing back in March, a call that didn’t quite come to pass, although global equities did stage a brief rally, registering a modest gain for the month, their only monthly gain so far this year.
JPMorgan’s strategists, particularly Panigirtzoglou and his colleague Marko Kolanovic, have been some of the most stridently bullish voices on Wall Street so far this year. But as noted above, other Wall Street strategists are much more bearish: for example, Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, said in a note to clients published Monday that downward earnings revisions could cause stocks to shed another 5% to 10% of their value.