- 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.
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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.