By Kevin Muir
The other day, CALPERS created a little bit of a stir with news they were considering increasing their bond allocation while selling down the stock portion of their portfolio. From Reuters:
The California Public Employees’ Retirement System, the largest U.S. pension fund, is considering more than doubling its bond allocation to reduce risk and volatility as the stock bull market approaches nine years.
Calpers is looking at a menu of options for its fixed-income target ranging from the current 19 percent to as much as 44 percent, according to a presentation for a board workshop in Sacramento coming up Monday. Equities could be cut to as little as 34 percent from 50 percent. Stocks were the best-performing asset class in fiscal 2017, returning almost 20 percent.
“The markets have had a pretty good run and it’s possible Calpers staff is thinking this might be a good time to lock in some of the gains,” Keith Brainard, research director for the National Association of State Retirement Administrators, said in a phone interview.
Well, maybe this phenomenon of large pension funds selling stocks to buy bonds will affect the market in the future, but I am here to tell you that the exact opposite is happening right now.
Over the past week, stocks and bonds have been almost perfectly negatively correlated, with stocks rising almost tick for tick as bonds fall.
Have a look at the intraday chart of the US 10-year yield versus the S&P 500 (don’t forget that higher yields means lower bond prices).
This morning’s action was the perfect example. Stocks opened down big on overnight weakness in global equities. Bonds caught a little bit of a bid, bouncing from their oversold condition.
Then once the stock market opened, the asset allocator came in with a fistful of blue tickets for stocks and an equal stack of pinks for bonds. Someone big is executing a monster buy-stocks-sell-bonds program. I don’t have a clue as to its size. I don’t know when it will end. But I am convinced it is happening.
And this is a gift. Stocks are looking increasingly wobbly. We have seen the bids disappear overseas in the Japanese Nikkei and the European eurostoxx, but the US is hanging in because of this program. When it finishes, US stocks will have precious little support.
In fact, if I had any guts, I would fade both sides of the program – sell stocks and buy bonds. I know that seems mad, but just look at the arrogance of that asset allocator – dancing right up against the glass like he doesn’t have a care in the world. Who does he think he is? Magic Mike?
Thanks for reading,