The Stock Market Is Looking Like February All Over Again as Major Money Steps Back

Major money is stepping back from the stock market, leaving retail investors holding the bag... just like in February before the last selloff.
  • Markets first peaked in early February as retail investors took over.
  • While professional money has come back strongly into this rally, headwinds have emerged.
  • A second wave of pandemic and November’s election will likely lead to major money investors holding back, which could end the market rally.

It’s a tale of two stock markets out there. While retail investors have piled into equities with record interest, major money is pulling back.

That’s similar to the trading setup in January and February. This time, zero percent interest rates and government support may avoid another 30% drop, but it could still be dicey.

While retail investors are partying, the professionals are starting to worry. Their biggest concerns? A second wave of infections leading to new shutdowns, and, now, uncertainty surrounding November’s election.

As a result of those fears, the market has two big punches to worry about. First is the outright sale by major money. The second is the lack of support from Wall Street’s biggest cheerleader—corporations themselves.

The First Market Punch: Institutional Selling Remains Intact

Pension funds, for instance, pulled $119 billion in the first quarter of the year. An estimate from Goldman Sachs is that quarter-end rebalancing will lead to at least $76 billion in selling in the second quarter.

That’s because pension funds tend to act a bit more conservatively. Rather than buy options on penny stocks or bankrupt companies, they tend to have a mix of stocks and bonds.

That’s not a bad spot to be in. Based on market performance this year, a traditional 60-40 portfolio of stocks and bonds would be in the green.

And according to data from PNC, a return-driven pension plan would have lost less than 15% in the first quarter, about half as bad as the stock market.

Pension funds declined less than 15% in the first quarter, thanks to their mix of stocks and bonds. Rebalancing trends indicate further stock selling ahead. | Source: PNC

And that’s assuming the bonds are in low-risk Treasury bonds rather than with a mix of higher-yielding fare.

The Second Market Punch: The Great Corporate Buyback Era Has Halted

That’s a lot of demand from major money. But it’s not the only source either. Companies have responded to economic uncertainty this year by pulling back on share buybacks.

This has been a significant source of demand, and share buybacks have helped keep a floor under share prices for years. In 2018 alone, share buybacks exceeded $800 billion.

Quarterly share buybacks more than doubled during the boom years. Now, uncertainty has led to a sharp pullback in share price support. | Source: Wolfstreet.com

However, that’s in the boom times.

In times of uncertainty, the cash going to share buybacks is best kept on the books, rather than retiring equity. In 2020, the number is likely to be less than half of last year’s based on what has been announced so far.

While some companies are quietly still buying back shares, most are holding back–just as they’re also suspending dividends.

With institutional investors on the sidelines, and with corporations sitting out on share buybacks, retail investors are left holding the bag.

While they can still impact the fortunes of some individual names, their combined firepower isn’t enough to prop up the entire market.

Are these factors enough to immediately tank the market? Probably not.

The gradual selling by major funds and a lack of share buybacks to boost a company’s earnings per share pose a risk to the market rally. The bright side? The market may end up grinding lower in the coming months without an extreme drop like last time.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: June 23, 2020 2:40 PM UTC

Published:
June 23, 2020 1:45 PM UTC
Posted in: MarketsOp-ed
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Andrew Packer @AndrewTPacker

U.S.-based money manager and financial writer with a focus on the stock market, options trades, real estate, commodities, and an interest in cryptocurrency and politics. Questions, comments, or snide remarks? Send 'em to apacker@gmail.com. LinkedIn Author Website Muck Rack Profile