- The upcoming month-end rebalancing of fixed-weight asset allocation portfolios should help stocks next week, according to a note from JPMorgan.
- Given that bonds have significantly outperformed stocks month-to-date, expect many portfolios that rebalance monthly to sell bonds and buy stocks to bring their allocations back to target, according to the note.
- “As a result, we would expect rebalances by these fixed weight asset allocation portfolios to provide a tailwind to equities next week,” JPMorgan said.
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As investors approach month-end, expect portfolio rebalancing trades to serve as a tailwind for stocks next week, according to a note from JPMorgan.
Previous research from the firm has shown that the rebalancing of fixed-weight asset allocation portfolios “tended to cause the market to mean-revert into month and quarter-end,” JPMorgan said.
Portfolio rebalance trades occur when an asset class within a portfolio is overweight or underweight its target allocation. Typically, portfolio managers execute the trades to bring to portfolio back to target allocation at either month-end, or quarter-end.
According to September-to-date performance figures, stocks have significantly underperformed bonds by around 8%, while quarter-to-date figures show stocks outperforming bonds by around 5%, according to JPMorgan.
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“The monthly rebalance effect is over 5x stronger than the quarterly rebalance effect,” JPMorgan said, citing historical data. Therefore, expect the net impact of portfolio rebalance trades headed into month- and September-end to favor stocks.
“The equity buying by monthly rebalancing portfolios much more than fully offsets the selling by quarterly rebalancing portfolios, meaning these portfolios are expected to be net buyers of equities into month/quarter-end,” JPMorgan explained.
Next week’s portfolio rebalances could drive 1% of equity outperformance, based on current market levels, JPMorgan concluded.