The S&P 500 up 2.8% in Nov implied $43b in potential pension selling, though not all rebalance monthly. We estimate that each 1% change in pension allocation equates to $31b in rebalance flows.

Pension rebalancing likely weighed on equities this week. Friday’s payroll rally also indicates that equities are not fully pricing in the pickup in growth. Aggregate equity positioning typically tracks the ISM but a large gap has opened up since August equity beta has fallen toward neutral though data has strengthened, likely reflecting taper fears. Although they have slowed recently, bond outflows are likely to resume on taper fears but a reset and stabilization in rates higher could see bond inflows with cash rates at zero and curves steep.Įquity positioning not pricing in strong data with taper overhang. We see equities as the beneficiary of cash re-deployment in 2014 as equity inflows have been running at a steady $23b monthly pace since February. Each year for the last four years from December to April, investors have moved cash out of money markets into bond and equity funds. H1 pattern sees cash in money markets re-deployed. With no LT inflows, $139b has piled up in money markets. Since May, taper fears have caused bond outflows while equity inflows continued, but the net of the two is zero. In a rare break of a 20y trend, inflows to long-term funds (equity, bonds, hybrid) stalled on taper fears, like the financial crisis and US downgrade. Taper fears halt inflows into long-term funds, pent-up cash of $139b. With short interest relative to market cap currently 0.4% above its bottom band, short covering will see that money flow back into US equities as catalysts pass such as the start of taper. This “outflow” of $30b from shorting has negated nearly half of the $65b of US equity inflows since May. The rise in total short interest (stocks, ETFs, futures) suggests investors are hedging a taper. Short interest rising since May pulled $30b from US equities. Account icon An icon in the shape of a person's head and shoulders.

Pent up cash