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Are Quant funds keeping the S&P 500 quiet this year?

Why Are Markets So Calm? It’s Revenge of the Quant Funds

Firms that use computers to determine buy and sell signals have been loading up while other investors sit back

S&P 500 daily moves in either direction

By Caitlin McCabe, WSJ

May 29, 2023 12:01 am ET

The U.S. stock market is surprisingly calm right now, especially in the face of the debt-ceiling fight. A key reason: a growing divide between mainstream investors, who have largely been sitting out the 2023 stock rally, and the machines whose buying has been driving it.

Only days remain until the U.S. blows past its debt-ceiling deadline. On Saturday, President Biden and Republican House Speaker Kevin McCarthy reached a tentative agreement to prevent a destabilizing default. But passage of the plan, which is expected to face opposition from some House conservatives this week, isn’t yet assured.

Despite the political uncertainty, the rebounding stock market has barely gotten nicked, with the S&P 500 finishing 0.3% higher last week. Over recent months, stocks have handily overcome stress in the banking system, stubborn inflation and interest-rate hikes. Last year, those kinds of issues repeatedly torpedoed stocks. This year, markets have met such events with a shrug.

The market’s steady rise has puzzled analysts and portfolio managers as the S&P 500 has churned more than 9% higher this year (and the technology-focused Nasdaq Composite has risen 24%). One explanation: Quant funds, or those relying on computer models and automated trading, have been doubling down on equity markets as other investors have stepped back, citing high valuations and concerns about the likely course of the U.S. economy.

Quant-fund buying has pushed these funds’ net exposure to U.S. stocks to the highest level since December 2021, according to data from Deutsche Bank. Mainstream investors, in contrast, have been pulling cash from stock funds and pouring it into money markets.

The continuing demand from quants has provided a lifeline for the stock market. Combined with robust corporate buybacks, their buying has helped counteract selling pressure and led to placid moves. The S&P 500, for example, has moved less than 1% in either direction for 36 of the last 46 sessions, according to Dow Jones Market Data, the quietest 46-day stretch since December 2021.

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