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

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

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NEW YORK, NEW YORK – NOVEMBER 26: Santa Claus waves from his sleigh float at the 94th Annual Macy’s Thanksgiving Day Parade on November 26, 2020 in New York City. The World-Famous Macy’s Thanksgiving Day Parade kicks off the holiday season for millions of television viewers watching safely at home. (Photo by Eugene Gologursky/Getty Images for Macy’s Inc.)

Optimism is building for stocks as U.S. investors return from the Thanksgiving Day holiday, though volumes may stay light for Friday as some stretch out the break.

With two sessions left, November is shaping up to be the best month since April for the S&P 500 SPX, -0.15%, and the best since 1987 for the Dow Jones Industrial Average DJIA, -0.57%, according to FactSet. 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 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 markets

Stock futures ES00, +0.26% NQ00, +0.42% YM00, +0.22% are pointing to some gains, while European equities SXXP, +0.05% were slightly higher. Asia stocks NIK, +0.40% 000300, +1.24% finished mostly higher. Bitcoin BTCUSD, -0.29% prices tumbled Thursday and were under $17,000 for Friday.

The buzz

Pascal Soriot, AstraZeneca’s AZN, -0.68% AZN, -1.81% chief executive officer, told Bloomberg that the company will need an “additional” global trial of the pharmaceutical group’s COVID-19 vaccine with Oxford University after questions over its initial efficacy data.

Germany has stretched out its pandemic lockdown measures until December 20 after hitting record daily death rates this week. Europe’s largest economy also wants neighboring countries to agree to shut ski resorts for the coming season. Delta DAL, +0.07% and Italy’s Alitalia are launching the first ‘quarantine-free’ flights from the U.S. to Europe.

Tesla will reportedly recall 870 of its electric vehicles in China over defective roofs

Shares of Slack WORK, +37.59% are down in premarket trading after a big runup late Wednesday as The Wall Street Journal reported that business software group  CRM, -5.37% is in advanced talks to buy the communications platform.

Retailers are in the spotlight as Black Friday shopping gets under way, though it may be a smaller affair as deals are spread across the holiday season.

Entertainment giant Disney DIS, -1.58% plans to lay off 32,000 workers, mostly at its theme parks as the pandemic continues to hurt its businesses.

Even if he leaves the White House, President Donald Trump said he would never concede an election victory to President-elect Joe Biden.

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.

Credit: MarketWatch

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