Will Pensions Derail The Trump Rally In 2017?

by Birch Gold Group, via Alt Market:

In the weeks following Trump’s unexpected election win, markets have soared. But some market watchers are starting to fear the “Trump rally” could be nearing its end.

They see one big indicator in trading activity that suggests a major shift might be coming soon. Plus, when pension funds move to rebalance their assets over the next few weeks, it could throw a wrench into the market’s current winning streak.

“Nobody is Selling…”

Even during big market rallies spurred by prolonged buying streaks, there’s still typically a healthy amount of selling activity too. It’s just part of the market’s natural balance. The interesting thing about the Trump rally, however, is how it stands as an exception to that rule.

In the last two months, there have been record-setting levels of buying in equity markets. The weird part is that there isn’t any selling going on in the background. Even Trump’s new special advisor on regulation, Carl Icahn, has noted this, saying that “nobody is selling” — and it’s making him a little nervous.

Americans’ stock holdings jumped to six-month highs over December. Clearly, most expect markets will rise even higher.

So far, there hasn’t been any selling activity to test just how strong the rally actually is. Nobody knows how quickly it could reverse into a free fall when sellers start re-entering the market.

Which leads to the next piece of the puzzle: while a selloff sparked by private savers might not be an immediate threat, the expected selling activity from mandatory pension rebalancing in January could be dangerous.

Pension Rebalancing And Why It Matters

Pensions and other funds like them are required to hold a certain ratio of different investments to maintain diversity in their portfolios and safeguard their beneficiaries. They have to respond to market activity and “rebalance” every quarter to get back to an appropriate spread of stocks, bonds, and other assets.

For example, imagine a pension is obligated to allocate 30% of its assets in stocks and 70% in bonds. Over the course of a quarter, if stocks take off and bonds slow down, the pension may be left them with 40% in stocks and 60% in bonds. So after the quarter ends, the pension will sell off 10% of its stocks in order to get back to its mandated portfolio allocation.

Why the “Morning After” on Jan. 1 Could Hurt Worse Than Usual

Once the clock strikes midnight on New Year’s Eve, a new and powerful selling force will enter the market in the form of pension rebalancing.

Since the last quarter of 2016 was such a boon for stocks, pensions may be looking to unload a sizeable chunk of their winning investments to restore equilibrium to their portfolios, resulting in big stock selling and bond buying. And that surge may throw the whole market into a tailspin.

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