Fund Rebalance Could Explain the Slowdown in Stocks

December 24, 2020
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Recent market rallies have made way for subdued growth in the markets this week. Heading into Christmas eve, the major indexes are hovering close to their previous levels, with no major expansion or contraction either way.

  • The NASDAQ Composite Index (COMP) closed down -0.29% on Wednesday.
  • The Dow Jones Industrial Average (DJIA) closed up 0.38% on Wednesday.
  • The S&P500 Index (SPX) closed up 0.07% on Wednesday.

To say these figures are underwhelming compared to the record-breaking performance of recent weeks would be an understatement. The good news is that there’s likely no reason for investors to panic.

Year-End Fund Maintenance Is Preventing Rallies

Any potential stock market rallies are likely being prevented by big funds rebalancing their assets, according to Wall Street analysts.

Large portfolio managers fund managers, and savvy investors are repositioning themselves for the new year. Experienced investors and professional managers prefer to stay neutral heading into unknown conditions, so trading activity is lighter than normal.

Even though Congress just passed a $900 billion fiscal relief package, it’s not enough to bet the entirety of 2021 on.

The Perfect Opportunity for Investors to Rebalance

While the large portfolio managers assess their assets, individual investors can take the opportunity to do the same.

The period from Christmas to the New Year is perfect for evaluating all holdings, their returns year to date, and their future potential. Investors who are holding stocks for the long term can look at their blue-chip options to identify any that haven’t performed in 2020, and consider shrinking their positions.

Bargain investors could look at their stocks under $10, and decide whether it’s time to buy more before prices increase beyond reach. Keep in mind, some of the bargain solar stocks of 2019 and 2020 are now past the $100 price range. It’s not uncommon to see bargain picks skyrocket. The end of the year is a good time to see which ones have momentum behind them.

Most importantly, now is the time of year when hasty investment decisions should be avoided. A slowdown in market activity is a time for reflection, allowing investors to get their portfolios into the best shape for the new year and all of the opportunities that will come.

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