Needless to say, those betting against US equities have had a rough go of it post-election.
Those betting that volatility would finally be stirred from its prolonged, Rip-Van-Winkle-esque slumber have had it even worse.
That’s not to say those bets were misguided. After all, US stocks are unquestionably stretched. Indeed, as Goldman noted on Friday afternoon, the rally in US equities from November 8 onward is entirely attributable to multiple expansion. Similarly, volatility is unquestionably too low considering the indeterminacy that surrounds the Trump administration’s policy agenda. As I never get tired of reminding readers, last month was the 3rd and 5th calmest January on record as measured by average VIX level and realized vol, respectively.
Still, “hope” remains. As noted earlier today, investors and corporate management teams are pricing in an exceptionally benign environment going forward even as analysts are far less sanguine. Apparently, it’s all about a “phenomenal” tax plan that none of us have actually seen. Or maybe it’s about fiscal stimulus that, if it’s implemented at all, won’t show up for quite some time.
In any event, those interested in a more comprehensive, granular breakdown of just what’s moving markets may find the following from Deutsche Bank of interest.
Via Deutsche Bank
- Recent leg up in equities driven by rising positioning and the return of buybacks. From a flows and positioning perspective, as we have noted previously, the first leg of the post-election rally was driven by large inflows, while equity funds actually cut exposure. Equity inflows then stalled starting in mid-December, buybacks slowed in the blackout period around Q4 earnings and the S&P 500 traded in a narrow range in an extended pause. Over the last 3 weeks, US equities have rallied as fund positioning rose, the buyback bid resumed as companies exited blackout periods and US equity inflows returned over the last week.
- Overall US equity fund positioning getting elevated. Elevated overall positioning reflects that of long-short hedge funds and asset allocation funds, while mutual funds are only modestly overweight. The elevated positioning is in line with positive data surprises.
- US macro data surprising positively again. Following a large positive surge to a 4-year high, macro data surprises had declined to neutral by the end of last year as consensus forecasts rose sharply. The typical historical pattern would have been for a negative or disappointment data surprise phase. Instead data surprises continued to hover around neutral for an unusually extended period and this week moved notably moved back up into positive territory.
- Equity flows return to the US after January lull. Equity flows in the first five weeks of the year had rotated away from the US which saw mild outflows, whereas the rest of the world saw large inflows ($32bn). Japan has been a disproportionate beneficiary directly ($14bn) and indirectly through international developed market funds ($11bn). Over the last week as US data surprised to the upside and rates rose, US equity inflows have returned ($9bn) while international DM funds again saw strong inflows ($4.7bn) and EM ($2.7bn) had the highest inflows in 6 months.