No Month-End Equity Selling but Likely Buying, Says JP Morgan's Top Quant Kolanovic
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Marko Kolanovic, Global Head of Macro Quantitative and Derivatives Strategy team at JP Morgan, argues that there won’t be much-expected month-end selling but actually there could be buying of equities into the month-end.
Kolanovic notes a “fairly weak” stocks performance recently despite the supportive macro fundamental outlook.
“The Fed has remained dovish, the US stimulus was released as planned, and the pandemic and vaccination in the US are steadily improving. The European COVID-19 situation is lagging behind that of the US and UK, which was broadly expected and well understood due to vaccination delays. Yet, if one looks at, for example, the Russell 2000, it has sold off more than 10% (market correction) in the last 10 days, and there is broad weakness across both cyclical and growth stocks,” says Kolanovic in a memo sent to the bank’s clients.
JP Morgan’s top quant adds that many investors still like stocks but are afraid of month- and quarter-end rebalances. In this context, investors are likely to wait for April to buy equities.
“Multi-asset portfolios with fixed target weights can rebalance monthly, quarterly, based on specific weight triggers, and increasingly are done with discretion/opportunistically (e.g., few days after month-end as we saw last year). In addition, increasing numbers of portfolios rebalance based on volatility targets, which often results in flow opposite to those of fixed weights. When looking at how many portfolios rebalance using monthly fixed weights vs. quarterly fixed (based on their impact on market), we find that fixed weight monthly rebalances are prevalent, while quarter-end rebalances effectively lost meaning and actually result in opposite flows (likely due to volatility target contributions to quarterly.”
He adds that quarterly rebalances have a low predictive power as the historic data shows an effect opposite to a rebalance. On the other hand, monthly rebalances are “significant and likely” amid the option roll effects.
“With the bond-equity spread down ~3% month to date, and ~8% quarter to date – historical analysis would imply bond-equity performance in the range of equities down 30bps to equities up 30bps for S&P 500 and actual positive performance for Russell 2000 (given that Russell is underperforming bonds month to date) in the range from up 30bps to up 80bps. So there is no expected negative impact on equities from month-end,” Kolanovic concludes.
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