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Wall Street: Records and Rebalancing

Wall Street: Records and Rebalancing

Estimated reading time: 3 minutes

Is a Rotation Coming?

There’s less than a week left in the first quarter of the year, and what a quarter it has been. Let’s take stock of how far we’ve come and what might lie ahead.

Investor expectations for rate cuts in 2024 moved down from as high as seven to as low as three today, we had an upside surprise bonanza of an earnings season, and the Bank of Japan ended its decade-long experiment with negative interest rates, just to name a few things. Oh and stocks did well… really well.

S&P 500 total returns are over 10% so far this year. Considering that the index has historically returned that much annually, saying that stocks are doing well might be an understatement. Additionally, the move higher for stocks has been a steady one, without much in the way of drawdowns to speak of. That’s led to the S&P 500 setting new all-time highs more than 20 times this year. 

However, it’s important to keep in mind that quarter-end periods can sometimes bring volatility and reversals as investors rebalance their portfolios, especially when there are differences in stock and bond returns. Stocks are up big while bonds have actually had negative returns this quarter, with the performance spread between the two asset classes the widest since the second quarter of 2020. Generally, rebalancing means bringing your portfolio back to its strategic asset allocation. For example, if your target allocation was a 60/40 mix and stocks were now 70% of your portfolio due to a strong rally, a rebalance would mean selling some stocks to buy bonds.

The wider the performance gap between parts of a portfolio, the more potential there is for rebalancing. And if enough investors rebalance, the rotation from stocks into bonds could cause a reversal in price trends, if only temporarily. Considering that this week’s calendar is devoid of any big data fireworks like we’ve had over the last few weeks, portfolio rebalancing might take center stage.

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