Pension Rebalancing Threatens to Spur $26 Billion Equity Selloff

(Bloomberg) — US stock investors looking for anything that could halt the rout might not be able to count on a source of support that’s buoyed markets in the past: portfolio rebalancing.

Every quarter- and month-end, pension funds and other institutional investors check their market exposures to make sure they meet strict allocation limits between equities and bonds, as well as between domestic and international stocks. Even amid a global rout, US equities still outperformed many other asset classes, leaving portfolio managers needing to cut their exposure.

When September wraps up, pension funds could be done selling roughly $26 billion in equities thanks to that relative outperformance, according to a Credit Suisse Group AG model.

That’s bad news for anyone who’d hoped buying from that past source of support could act as a lift this time around too. In the last two quarters, the rebalancing by the world’s biggest money managers revived equities by bringing $250 billion into stocks in June and $230 billion in March, according to estimates by JPMorgan Chase & Co.

The S&P 500 lost as much as 2.7% on Thursday as market sentiment soured amid concerns about inflation and the global economy. While the index has slumped 3.7% in the third quarter, global equities have fared even worse, dropping 5.6% with emerging-market stocks falling roughly 12%.

That could give international stocks a boost as Credit Suisse expects buyers to snap up about $46 billion in non-US equities, with $16 billion of that tied to emerging markets. The bank warns the timing of trades could vary dramatically on market sentiment and regularly scheduled cash flows, among other pressures.

Don’t expect the historically stabilizing force of the target-date funds (TDFs) to lead to the usual “miraculous quarter-end stock market rallies,” said Vincent Deluard, a macro strategist at StoneX Financial Inc.

“Equities have outperformed bonds this quarter so the TDF whale should not save the stock market this week,” he wrote.

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