Marko Kolanovic Says Stop Blaming Rebalancing for Stock Losses

(Bloomberg) -- Be careful attributing the recent retreat in equities to selling by giant funds like pensions that supposedly must dump winning wagers to adjust portfolios, says Marko Kolanovic, JPMorgan Chase & Co.’s chief global markets strategist.

The practice of month-end or quarter-end rebalancing is being trotted out to explain this week’s equity weakness and the rally in bonds. But Kolanovic says his math shows the effect is too random to premise an investment case on.

Given the performance spread between bonds and equities for the month and quarter, historic analysis implies an up-or-down move of 30 basis points for the S&P 500 as a result of rebalancing. Since small-cap stocks have trailed the market, the Russell 2000 should get a boost, according to his model. Instead, the two benchmarks are down more than 2% and 8% from their recent peaks, respectively.

Kolanovic says even though quarter-end operations don’t have much predictive power, the fact that they are believed to move markets can sometimes create tradeable moments. “Many investors still like equities, but are afraid of month- and quarter-end rebalances that are broadly advertised as an event that will lead to equity selling,” Kolanovic wrote in a note to clients. “We caution investors that the impact on the market may be positive with a near-term upside move.”

Talk about rebalance-fueled rotation was heating up with the S&P 500 heading for one of its best starts to a year in history relative to Treasury bonds. Estimates on such equity selling have been in a wide range, with analysts at Credit Suisse eying $33 billion while Kolanovic’s colleagues at JPMorgan flagged sales exceeding $100 billion at the start of March.

©2021 Bloomberg L.P.