After a recent spate of losses in stock markets, a wave of buying began, but it wasn’t retail investors stepping in to take advantage of lower prices. Instead, the publicly traded companies themselves were propping up markets by buying back shares. Bloomberg’s Lu Wang reports:
As the S&P 500 slumped 6% over six days through Monday, companies boosted share buybacks to almost $10 billion a day from $3 billion previously, the firm [JPMorgan Chase & Co.] estimates. With stocks sinking and bonds rallying, the big gap in performance spurred a rotation to equities among funds that need to go back to preset asset allocation levels, Kolanovic says.
Wang goes on to report that in addition to buybacks, automated rebalancings also made up much of the volume as the market rebounded.
Also helping stem equity losses are fund managers who need to rebalance their portfolios when asset allocations deviate from desired levels. Such rebalance is usually done monthly or quarterly, but when stocks and bonds move violently as they just did, funds may opt to adjust right away, according to Kolanovic.
These managers “have built-in triggers to rebalance immediately if the equity-bond spread moves beyond a certain threshold,” he wrote. “Equity drop of 7% and bond rally of 3% (+10% spread) would have triggered many of these rebalances leading to equity inflows.”
Couple the interventions of firms propping up their own stock prices with the knowledge that during volatile markets up to 90% of trading may be done by computers, and you begin to wonder who is really moving the market. Read more here.
Jeremy Jones, CFA
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