Are Stocks Rallying or Just Playing Catch-Up?

Market participants have tied themselves up in knots trying to explain why stocks in the U.S. and globally have enjoyed one of their strongest rallies in years this month. The consensus is that central banks led by the Federal Reserve have turned more dovish. But central banks are signaling lower interest rates in part because their economic outlooks have deteriorated, a circumstance that should weigh on equities. That’s especially true with earnings growth having stalled. Now comes JPMorgan Chase & Co. with perhaps the best, most logical explanation for what’s going on the stock market.

These strategists, led by Nikolaos Panigirtzoglou, are out with a research report concluding that the gains are nothing more than a simple rebalancing. To them, the surprising rally in the bond markets has left big investors underweight equities, creating a need to buy equities to rebalance their portfolios to be in line with their mandates. That does make sense, as the Bloomberg Barclays Global Aggregate Bond Index is up 5.07% in 2019 already, or about the double average yearly return going back to the financial crisis. Other data and surveys back up JPMorgan. Bank of America’s monthly survey released last week revealed that investors are their most underweight equities since the financial crisis. The good news for equities is that there is more upside. JPMorgan figures the MSCI All-Country World Index, which has gained about 6.34% this month, would need to rally a further 7.8% before investors were to become as overweight equities as they were in September, just before markets suffered their end-of-year crash.