First of the Month Money Flows May Overshadow NFP Report

In healthy bull markets over the  previous two decades stock traders and market-makers have come to count on the predictable pattern of 401K inflows into stock indices. The flows are tied to employees pay cycle and tend to be most predictable at the beginning of a new month. Most employees of blue-chip firms and other well run businesses have the option of contributing to a 401K, or other tax free investment vehicle, and are given matching funds by their employers. Given the employers matched amount is a significant amount of money year in, year out it makes sense that an employee would opt for the largest percentage allocation they can afford.  On average woman tend to allocate as much as 9% of their annual salaries while men average between 6 to 8% to these programs.  Add up all the employees of all the well run companies in just Chicago, or New York alone, let alone the world, and you realize that every pay-day there is a significant amount of money going into securities markets every payday on behalf of these employees. The thing to remember about these employees is many are still in the first half of their work cycles, meaning they are more likely to go with a more aggressive choice for their money, such as a blue-chip stock index. And business schools don’t teach market timing, they teach dollar-cost-averaging and compound interest, which is exactly the investment plan a 401K was designed to provide.

What is significant about this for market observers is the stock market’s reaction to these inflows, and in-turn, the reaction of other asset class markets to the stock market. March 1st was a good example. Despite the previous 4-months in a row of higher prices on the first of the month, March 1 was a dud, and prices swooned shortly thereafter with the other asset class markets following suit – U.S. stocks and AUDUSD were down hard the first 2 weeks of March, before the Japanese disaster.  What March 1st most likely told us was a large player – multi-billion dollar hedge-fund or sovereign fund — took the opportunity of all the 401K money coming in to exit a substantial long position. What is significant about this Friday is, along with being the first Friday of the month and the release date for the U.S. non-farm payroll numbers, it is the 1st of the month again, making it a good day to judge the market’s strength given the likelihood of incoming 401K money. Keep in mind index fund managers are not paid to time markets, they are paid to put that money to work as soon as they can.

Jay Norris is host of Live Market Exercise at Clovernest.com and the author of Mastering the Currency Market, McGraw-Hill, 2009.

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