Month-end Rebalancing Is All The Talk At The Moment

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Month-end rebalancing

Balanced funds need to stay in balance.

So when equities massively outperform in a month and bonds struggle, they need to rebalance. So they sell equities and buy bonds.

This month that's the obvious trade at month-end because stocks have had a huge run and bonds have struggled. Now is a chance to front run it.

As the Market Ear highlights, S&P 500 futures outperformed bonds by more than 9%. We've only seen that 6 other times since 2000 at this point in the month (the 23rd). In each of those 6 instances, equities underperformed Treasuries over the 5 trading days into month end.

Goldman Sachs sees $36B in US equity selling, the 4th largest since 2000 and JPM sees around $160B in global equity selling. The Euro Stoxx 50 is up almost 20% this month.

Over at Bloomberg, Cameron Crise highlights that the Monday before the last week of the month is generally the time to make the trade but also highlights that since 2996 in months were stocks outperformed bonds by at least 5%, the average stock market rally in the final week of the month was 0.21%.

At the moment, I tend to think that the fundamentals are in charge. The vaccine optimism is real and it's clear now (and has been for awhile) that the market can look through this winter.

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