Inside Markets — January Inflows

The US equity market absorbed a good amount of supply in the last week of the year as quarter-end pension fund rebalancing (out of equities/into fixed income) likely amounted to ~$19B. With pension fund rebalancing now over, it’s important to recognize that January is the single largest month of the year for equity inflows (401k assets are the largest contributor). January is also the month when hedge funds usually ‘re-gross’ or add leverage, which should add to the short-term bullish dynamic. January equity inflows have a tendency to make their way to some of the prior year’s biggest laggards in what’s known as the ‘January Effect.’ The January Effect started last Thursday, but will likely ramp for the next few sessions before fading into earnings season that begins on 1/15.

Ten-year Treasury yields are now testing the 12/27 high of 4.63%. A sustained close above 4.63% would become a headwind for equities that could be hard to recognize given the positive inflow dynamic discussed above. Higher bond yields will become a stronger headwind above last year’s high of ~4.70% and an even stronger one above the cycle high of 4.99%.