Did Pensions Just Kill The Rally: Quarter-End Rebalancing Suspended Until Further Notice?

Last week, with stocks at 2016 lows, without a buyer in sight, with stock buybacks dead and buried, we first reported that according to JPMorgan calculations, some “$850 Billion In Stock Buying Is About To Be Unleashed” largely due to pension fund quarter-end rebalancing, which promptly served as the straw clutched by bulls everywhere who were hoping that with at least one set of investors forced to buy, the S&P500 may have hit a bottom, if only for the time being.

This is what we said:

According to JPMorgan estimates, balanced or 60:40 mutual funds, a $1.5tr universe in the US and $4.5tr universe globally, need to buy around $300 billion of equities to fully rebalance to 60% equity allocation.

At the same time the $7.5 trillion universe of US defined benefit plans, would need to buy $400 billion to fully rebalance and revert to pre-virus equity allocations.

Finally, there are the “balanced” sovereign pension funds such as Norges bank and GPIF, which before the correction had assets of around $1.1tr and $1.5tr, respectively, and which according to JPM would need to buy around $150 billion equities to fully revert to their target equity allocations of 70% and 50%, respectively.

Then, a few days later, as stocks exploded higher, entering a bull market a record short 4 days later, yet with nobody knowing exactly why, the same strawman reappeared and as we reported according to desk chatter, “Traders were Betting That “$850BN Buyer” Is In The Market.”

It didn’t take long for desperate permabulls everywhere, both institutional and retail, to hang their hats on the pension rebalancing strawman, with that relentless optimist, JPMorgan’s Kolanovic, doubling down and after last week’s bull market, betting that the forced buying would continue, with supposedly another $125BN in buying on deck.

JPM Kolanovic: We estimate that re balance for the month end which is Tuesday could be around $100-$125B now. We think 60% still needs to be done 40% in a relatively short period of time… Trump is now on point risk reward is to be long time to risk some $$$ GL

— FxMacro (@fxmacro) March 30, 2020

By now we had entered “make up numbers” territory: since nobody can determine for sure how much pensions are buying, may as well throw out very big numbers. After all, the whole point of the exercise is to spook the market into covering shorts, starting a buying cascade.

And while this self-fulfilling prophecy certainly worked last week and for much of Monday’s ramp, a glitch emerged late on Monday when Reynolds Strategy strategist, the eponymoys Brian Reynolds, said that this most transparent exercise in stirring stock euphoria may have just suffered a potentially terminal blow after “a large California pension has postponed their scheduled quarterly rebalancing” adding that as California pensions are the “thought leaders in the pension community”, it is likely that “others will either follow along in postponing or reducing anticipated rebalancing.”

Reynolds was referring to an article in P&I online, according to which “Los Angeles City Employees’ Retirement System’s board temporarily modified its asset allocation and rebalancing policies, which includes allowing the staff to defer rebalancing its asset allocation if deemed appropriate, said Rodney June, CIO of the $15.1 billion pension fund, in an email.”

“The market conditions are unusual and volatility is well beyond historical norms,” said a staff memo for the board’s meeting Tuesday. “Staff believes that while extreme market volatility is present owing to the decline in the total portfolio value … shoring up liquidity within the UCA (unallocated cash account) is important to ensure that LACERS can readily meet ongoing cash flow obligations of approximately $95 million per month.”

The memo also said suspending rebalancing during extreme periods of volatility is prudent.

“Understanding that an out-of -balance asset class due to large market swings may later ‘self- balance’ due to a stabilization of the market may help prevent premature rebalancing that may incur costly market impact and transaction costs,” the memo said.

To many efficient market supporters (what’s left of them now that the Fed has nationalized capital markets) this comes as a long overdue measure: after all, why do Pensions wait until the last few days of the quarter to buy stocks, knowing well that they will be frontrun by other investors who are all too aware of their buying intentions, in the process yielding far lower returns for their stakeholders by buying stocks at higher prices; which one can argue is a breach of their fiduciary duties as pension funds can easily get far better prices if only they kept their rebalancing times and dates a secret.

By the looks of things, that’s precisely what they are doing.

In short, pension rebalancing – which so many bulls have relied upon it to stir up buying demand in the last few days of the month – may have just gone extinct. The only question is whether this revision is effective as of this quarter, and are investors not frontrunning pension buying but merely themselves… first on the way up and then on the way down.