The “Trump Rally” has generated a lot of enthusiasm in the investing community. Despite the cheerleading for the Dow to break through 20,000 before year-end, the market is meandering tantalizingly below that level.
We write this around noon on Wednesday, December 28th, and anything can happen between now and the end of the week. There is, however, another factor in play that may keep the rally from breaking that magic number in 2016: pension fund rebalancing.
Pension funds have to have a balance between stocks and bonds to meet their risk tolerance targets and investment obligations. That means as stocks go higher and tilt the portfolio weighting, pension funds will have to sell some of their stock holdings and buy bonds.
Jim Brown at Option Investor wrote this:
The pension fund rebalance for the end of December could see between $38 and $58 billion in equities sold according to Credit Suisse. Stocks have rallied so much since the election the pension funds have to sell stocks and buy bonds to bring their mandatory ratios back into balance. That suggests Thursday/Friday should have a negative bias. Normal volume will be very low so that means even $38 billion in fund selling could have a significant impact.
This helps explain why the market seems to be stuck in neutral so far this week, and why it may stay that way until January.