Quarter-End Buying May Boost Stocks Ahead of Next Market Storm

Trader on the floor of the NYSE, June 7, 2022.

Source: NYSE

The stock market is about to close its worst first half in decades in the coming week, setting the stage for a summer of uncertainty and volatility.

But in the very short term, strategists see a window of positive momentum for an oversold market and say the end of the quarter could be a time for some quick gains. That period, leading up to the last trading day of the month, is when many portfolio managers shift their investments, or rebalance, to offset changes in the values ​​of their stock and bond holdings.

JPMorgan’s Marko Kolanovic, meanwhile, sees a case where shares could rise 7% in the coming week, based solely on rebalancing. With the S&P 500 Down more than 14% in the second quarter and down 18.6% year-to-date, investment managers will need to boost stock holdings to recover asset allocation levels.

“Next week’s rebalancing is important as equity markets have fallen significantly over the past month, quarter and six-month period,” wrote Kolanovic, chief global markets strategist at the firm.

Recent rebalancings have been positive for stocks, and that could mean this one will be too, he noted. For example, at the end of the first quarter, the market was down 10% and there was a significant 7% rally in the last week of the quarter. The same type of move also occurred in the smaller May month-end rebalancing, when shares were up about 7% entering the final week.

“It’s occurring in a period of low liquidity. On top of that, the market is in an oversold condition, cash balances are at record levels and recent market shorting activity has reached levels not seen since 2008,” he added. Kolanovic.

But after a rally, some strategists are already expecting a choppy third quarter.

“Historically, the third quarter, along with the second quarter, are the worst quarters of the 16-quarter presidential cycle,” said Sam Stovall, chief investment strategist at CFRA. “Once the uncertainty associated with the midterm elections has run its course, or once the third quarter has run its course, the fourth quarter and the next two quarters are the best of the 16-quarter presidential cycle.”

According to the CFRA, the S&P 500 fell an average of 0.5% in the third quarter of the second year of a presidential term, after an average drop of 1.9% in the second quarter. In the data, which goes back to World War II, there was an average rebound of 6.4% in the fourth quarter.

The midterm elections are in November and many political strategists expect a power shift to Republicans in Congress.

Stovall said that for now, the market could trade higher at the start of earnings season. “If history repeats itself, from a time perspective, we get a tradable rebound now,” he said. But he added that could be followed by a crash later in the quarter and could ultimately bring capitulation.

If the second quarter ends near its current level, it would be worst first half for stocks since 1970. But according to Stovall, a bad first half doesn’t necessarily mean a bad year.

“Of [previous] five worst since 1929, the five were highest in the second half and gained an average of 23.7%… Of the next five, four of the five are down and the average is a decrease of 7.8%”, Stovall said.

holiday market

The week leading up to the long 4th of July weekend appears to be fairly quiet, although there are a few key economic reports. Corporations may also release some earnings guidance, particularly if they expect to miss expectations in the upcoming reporting season.

On the economic front, the most important could be Thursday’s personal consumption expenditures data, which includes the PCE deflator inflation reading, which is closely watched by the Federal Reserve.

The durable goods report will be released on Monday. Data on consumer confidence and home prices from S&P/Case-Shiller are due out on Tuesday and ISM manufacturing on Friday.

“I guess the market is trying to recover right now with bond and equity yields falling for a few decent sessions,” said Jimmy Chang, chief investment officer at the Rockefeller Global Family Office. “It could probably pick up until the 4th of July holiday, and the real show starts with earnings season.”

Major banks start reporting earnings on July 14 and 15.

“For the second week of July, we’ll see what the tone is going to be with earnings, and I would expect a much choppier market given my expectations that some of these companies will remove guidance,” Chang said. She said what’s not clear is how much of the anticipated negative news is already priced in, given the sharp market decline.

“Guidance is crucial,” said Quincy Krosby, chief equity strategist at LPL Financial. “What the market is trying to decide is whether or not we are headed for a recession and what kind of recession…Corporations in their guidance at this crucial stage will tell us whether or not the market is primed for a deeper recession.” . sell.”

Stocks rose on Friday and bond yields were also recovering from a sharp drop after rising sharply the previous week. The benchmark 10-year Treasury yield exceeded 3.48% on June 14, slipped to 3% on Thursday. It returned to 3.11% on Friday. Bond yields move opposite prices.

A big source of angst for investors is whether inflation will continue to rise and prompt aggressive interest rate hikes from the Fed, leading to a possible recession. The bond market last week reflected some of that fear, after the Fed raised rates by 0.75 percentage point the previous week and looks set to raise the fed funds rate by a similar magnitude in July.

“It’s a full-throttle narrative. You go from fears of inflation and a 75 basis point increase… to realizing that the more the Fed raises, they will eventually drive us into recession. All of this in a matter of a week.” “. said George Goncalves, head of US macro strategy at MUFG.

week ahead schedule

Monday

Profits: Nike, trip.com

8:30 a.m. Durable Goods

10:00 am Pending Home Sales

Tuesday

Profits: aero environment

8:30 am Economic advance indicators

9:00 am S&P/Case-Shiller Home Prices

9:00 am FHFA Home Prices

10:00 a.m. Consumer Confidence

Wednesday

Profits: bed Bath And Beyond, general Mills, McCormick, paychex, MillerKnoll

8:30 am Real GDP Q1 (third reading)

9:00 am Fed Chairman Jerome Powell at the European Central Bank forum

11:30 a.m. Loretta Mester, President of the Cleveland Fed

1:05 p.m. St. Louis Fed President James Bullard

Thursday

Profits: Micron, Walgreen Boots Alliance, constellation markings, Accolade

8:30 a.m. Initial Claims

8:30 am Personal income/expenses

9:45 a.m. Chicago PMI

Friday

Vehicle sales

9:45 am S&P Global Manufacturing PMI

10:00 a.m. Manufacturing ISM

10:00 a.m. Construction expenses

2:00 pm The bond market closes early for the 4th of July holiday

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