Rebalancing and extreme oversold S&P 500 could fuel equities

Sentiment in global equities have improved significantly over the past 48 hours on the Fed’s open-ended quantitative easing programme and Germany’s large stimulus package as described in yesterday’s equity update. But besides policy moves two technical catalysts could send equities higher.

Rebalancing could add as much as $1trn into equities

There was about $30trn in pension funds in the OECD countries in 2019 assuming 8.8% return on funds from 2018. In many standard strategic asset allocations the mix between equities and fixed-income has shifted to much and potentially out of the allowed weight bands. If we assume a 2.5%-point rebalancing into equities, which is not unreasonable given the move in March, then rebalancing will add $750bn in capital that will allocated into equities over the near term. Add to this life insurance companies, retail investors, endowments and family offices and the amount quickly moves above $1trn in rebalancing.

S&P 500 is extremely oversold by historical standards