Photographer: Michael Nagle/Bloomberg

U.S. Stocks Face $100 Billion in ‘Systemic’ Outflows, JPMorgan Says

  • Says technical flows contributed to ‘flash crash’ in afternoon
  • Sell-off ultimately offers buying opportunity, strategists say

Surging market volatility will probably trigger some $100 billion of outflows from U.S. stocks by funds following so-called systematic approaches, according to JPMorgan Chase & Co. strategists.

“Selling from trend-following strategies” contributed to the mini flash crash that hit U.S. equities around 3:10 p.m. on Wall Street, JPMorgan strategists Marko Kolanovic and Bram Kaplan wrote in a note. Unwinding of positions betting on continued low volatility -- known as index-option gamma hedging, short-volatility trades and volatility-targeting strategies --
were also behind the outflows, they wrote.

Kolanovic says the huge increase in market volatility Monday will fuel further outflows from systematic strategies in the days ahead, adding up to around $100 billion.

Still, the strategists see some reason for optimism, as "strong" underlying fundamentals argue for a recovery in time.

“The large market decline over the past few days will likely draw fundamental investors and even trigger pension-fund rebalances," and could prompt policy makers to try to calm things, Kolanovic and Kaplan wrote. “Rapid sell-offs, such as the one today, can also be followed by market bounce-backs as liquidity gets exhausted by programmatic selling."

Valuations on a price-to-earnings basis are now more attractive, the impact of U.S. tax cuts is still to come and the market turmoil might be helping to stabilize bond yields after they surged over the past month, they noted. “We think that the ongoing market sell-off ultimately presents a buying opportunity.”

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