After the Christmas Eve bloodbath and Christmas Day holiday, the US stock markets finally recovered with a brief but big move upward last week. On Wednesday, the Dow Jones Industrial Average (DJI) notched a 1,086.25 point gain, the biggest point gain in history, to end 5% up, soothing doubts of a prolonged bear market. On Thursday, volatility reared back, and the S&P 500 (INX) opened sharply lower before reversing to close 0.86% higher. And on Friday, in another wild trading session, the S&P 500 ended flat, down 0.12%, after intense selling in the last hour. Overall, the stock markets finished the week solidly in the green, with the three major indices rising more than 2.75% and pulling out of the bear market. However, stocks are still down nearly 10% for the month, meaning it could still be the worst December performance since 1931.
The American bond markets also performed relatively well during the volatile month. The yield on the 2-year Treasury note fell 1.4 basis points to 2.534%, thanks to investors buying Treasury notes in a flight from equities to safety. The 10-year Treasury note yield was unchanged at 2.74%, and the 30-year Treasury bond rose 1.8 basis points to 3.048%, likely as investors shied away from Federal Reserve interest rate risk. Because bond yields move inversely with bond prices, bond holders gain price increases when yields decrease. The 2-year Treasury note moved the most since the week of November 16, its yield falling to a six-month low. It seems that the government shutdown and upcoming gridlock in Congress have not yet affected investors' sentiment on bonds as safe haven assets.
Although nobody knows for sure, a theory has been proposed to explain the surge in equities this week: pension funds are buying before the year ends. According to Wells Fargo (NYSE: WFC) analysts, pension funds need to buy $64 billion worth of shares in December thanks to the end-of-the-quarter period. They usually rebalance their holdings at the end of each quarter, selling winners and buying losers. That means pension funds are selling bonds and buying stocks. The $64 billion figure is historically large, likely because market liquidity is relatively low over the holiday period. Pension funds usually execute buy orders near the end of trading days, which could explain the recent big reversals. The pension fund managers are betting big on US stock indices, having invested $35 billion in large caps and $21 billion in small caps this quarter. With one more trading day until 2019, traders and investors will look to see if pension funds continue buying stocks and supporting the US stock markets.
The author owns a small long position in the S&P 500 (INX).