While stock market strategists at Bank of America and Morgan Stanley grow increasingly bearish, JP Morgan’s equity research department has churned up yet another bullish note for the bank’s clients, advising them about the potential for massive month- and quarter-end rebalancing flows that could trigger a sustained rebound in stocks, putting even more distance between the US benchmarks and the bear-market territory with which the S&P 500 index was flirting late last week.
The team of JP Morgan equity quants, led by Nikolaos Panigirtzoglou, told the bank’s clients that potentially more than $250 billion could flow into stocks by the end of June as American mutual funds and pension funds, along with foreign pensions and sovereign wealth funds, “rebalance” by buying stocks and selling bonds to compensate for the latest drop in stocks.
In their latest report on equity flows and liquidity, the team said it expects between $34 billion and $56 billion of buying by “balanced” mutual funds (that is, funds that aim to maintain a 60:40 weighting of stocks to bonds in accordance with the principles of Modern Portfolio Theory).
But even larger than the mutual fund universe is the world of defined-benefit pension funds, which Panigirtzoglou and his team believe could dump as much as $167 billion into US stocks by the end of June.
These funds have an aggregate AUM of $7.5 trillion, according to JPM, and although pension funds tend to rebalance more slowly than mutual funds, the JPM team suspects that they might be behind the 8-ball on rebalancing for April, leaving more room for buying as we head into the summer months.
Finally, the JP Morgan analysts expect an additional $40 billion of inflows from major foreign buyers like the Norges Bank (which controls Norway’s massive sovereign wealth fund), the Swiss National Bank (which has a large portfolio of US equities) and Japanese pension funds.
All told, that’s potentially more than $250 billion of inflows that could bolster stocks. Since algorithmic traders like Commodity Trading Advisors often trade based on momentum, the initial move higher in equities caused by these inflows could potentially trigger a virtuous feedback loop that could see stocks erase more than half of their year-to-date losses – at least, according to JPM.
To be sure, the JPM team had expected a significant bump in equity prices due to rebalancing back in March, a call that didn’t quite come to pass, although global equities did stage a brief rally, registering a modest gain for the month, their only monthly gain so far this year.
JPM’s strategists, particularly Panigirtzoglou and his colleague Marko Kolanovic, have been some of the most stridently bullish voices on Wall Street so far this year. But as noted above, other Wall Street strategists are much more bearish: for example, Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, said in a note to clients published Monday that downward earnings revisions could cause stocks to shed another 5% to 10% of their value.