Volatility Warning: Weak Share Buybacks and Pension Funds' $32 Billion Sell-Off Could Upset the Market
Traders are in for a short week as both the US stock and bond markets will be closed on March 29 to observe Good Friday, a religious holiday that falls on the Friday before Easter. However, the market may face short-term pressure this week as some cautious investors are becoming concerned about potential large-scale stock sell-offs by pension funds due to quarterly rebalancing, coupled with the weakening purchasing power of corporate buybacks, a key force in the market.
Pension funds and other institutional investors conduct quarterly and monthly checks on their market risk exposure to ensure that their asset allocation aligns with established targets while controlling portfolio risk. This typically involves reallocation between stocks and bonds. In general, if the stock market performs well, the proportion of stocks in the pension fund investment portfolio may exceed the target proportion, requiring the sale of some stocks and the purchase of other assets such as bonds to rebalance the investment portfolio. This quarter, this is the case.
The global stock market, as measured by the MSCI All Countries World Index, has risen by about 7.7% since the beginning of 2024, while the global bond market, as measured by the Bloomberg global-aggregate bond index, has fallen by about 2.1%. This means that in this quarter's readjustment, pension funds and other institutional investors may need to sell more stocks than usual. According to Goldman Sachs research team's forecast, pension funds may sell an estimated $32 billion of stocks to rebalance their positions, and this level will be the largest adjustment since June 2023 and rank in the 89th percentile among estimates over the past three years.
Considering the short trading days this week due to the holiday factor, pension fund selling may add additional pressure to the market. Goldman Sachs analysis indicates that the culprit behind the "flash crash" at the end of trading on Tuesday may also be this factor. In addition, the market faces negative factors such as volatility in monetary policy expectations, concerns about overvaluation, geopolitical uncertainty, and profit-taking by traders. The unprecedented surge in meme stocks fueled by $Trump Media & Technology (DJT.US)$ has also made the market lack calmness and more susceptible to the impact of bearish news.
1. Temporary Loss of Stock Buybacks: A Major Blow to the Market
As April approaches, the US stock market is getting closer to the stock buyback blackout period. Based on UBS research's predictions, from now until early May, there will be a notable decline in overall stock buybacks, eventually reaching nearly zero. This implies that the US stock market will temporarily lose its most significant support factor.
2. Hawkish Signals from the Federal Reserve
One of the strong candidates for the next Federal Reserve Chair, current Fed Governor Waller, made hawkish comments on Wednesday. He emphasized four times that there is "no rush" to cut rates, and stressed that recent US economic data suggests a delay or reduction in interest rate cuts this year. The market is closely watching this week's PCE data for any signals it may bring.
3. Market Sentiment May Be Too Optimistic
Based on the latest statistics from Bank of America, the $S&P 500 Index (.SPX.US)$ has remained immune to a substantial drop for more than 310 days, assuming a noteworthy decline of over 2% in the index. This remarkable streak has only occurred ten times since 1928, making it a rare feat in the stock market. The $CBOE Volatility S&P 500 Index (.VIX.US)$, seen as the fear gauge, has been persistently declining and is currently at 12.78, significantly lower than the historical average level of around 20. The low VIX index also suggests that the market may be too optimistic.
Investor sentiment surveys also provide similar signals. The latest AAII ( American Association of Individual Investors) Sentiment Survey, released on March 27th, revealed that nearly 50% of respondents expressed bullish sentiment, a significant increase from the previous week and at a near three-year high. According to convention, this sentiment indicator is considered a reliable contrarian indicator. A generally optimistic sentiment indicator may indicate that market participants are overly confident about the future, posing a risk of market reversal.
Source: moomoo, AAII
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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