Goldman Sachs top trader: On election day, "buckle up," any clear result will severely impact U.S. stock volatility

Wallstreetcn
2024.11.05 18:42
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Goldman Sachs hedge fund research head Pasquariello stated that the trading community has significantly reduced risk in recent weeks, with a substantial decrease in macro positions, most notably in U.S. interest rates; if investors quickly follow the market trends brought about by the initial election voting results, he will closely monitor the bond market

On November 5th, Tuesday, the U.S. election showdown day arrives. Tony Pasquariello, Goldman Sachs' top trader and head of hedge fund research, warns that those who prefer risk investments should "buckle up," stating that fund managers have recently taken the initiative to reduce risk.

Pasquariello indicated that the flow of proprietary funds at Goldman Sachs clearly shows that the trading community has been preparing for the election in recent weeks, significantly lowering risk. Data from Goldman Sachs' prime brokerage (PB) shows that the total portfolio exposure of fundamental long/short strategy stock fund managers in the U.S. stock market has dropped to its lowest level since March 2023.

Moreover, the reduction in positions is not limited to hedge funds. Last week, clients who only employ long strategies net sold $10 billion in stocks, marking the highest weekly sell-off this year, which may be for raising funds for other actions, or it may not.

There are also other obvious defensive signs in the U.S. stock market, evident in the options skew and S&P futures positions (recent trend = long positions decreasing, short positions increasing). In addition, Pasquariello pointed out that positions in the macro space seem to have significantly decreased, most notably in U.S. interest rate positions.

Pasquariello believes that this Tuesday will be both relaxed and capable of achieving good returns from the beginning of the year to date, and investors will quickly follow the market trends brought by the initial election results. If this prediction is correct, he will closely monitor the bond market, where the preference has consistently been to sell the middle and/or back end of the yield curve.

For stocks, the most clear point for Pasquariello is that any seemingly clear election result will quickly devastate implied volatility.

Earlier this week, Wall Street Journal mentioned that Wall Street strategists generally believe that U.S. Treasury yields will determine the direction of U.S. stocks after the election.

Among them, Morgan Stanley's chief U.S. equity strategist Mike Wilson's team believes that in the event of a Trump victory, with the Republican Party sweeping both the House and Senate, if U.S. Treasury yields remain within a certain range (e.g., fluctuations in the 10-year Treasury yield do not exceed 20 basis points) in the days following the election results, and the rise in yields is driven by improved nominal growth expectations, then cyclical stocks (financials, industrials, and sectors sensitive to commodities) may perform excellently and drive the index higher If the election results are announced and U.S. Treasury yields rise "significantly," driven by increased term premiums due to market concerns about the sustainability of the fiscal outlook, risk aversion in the stock market may intensify.

If Harris wins and Congress becomes divided, with the House and Senate controlled by the Democrats and Republicans respectively, consumer goods stocks affected by tariffs and renewable energy stocks are expected to perform well. A decline in interest rates may also benefit housing-sensitive consumer stocks and high-beta stocks, while financial stocks, industrial stocks, and sectors sensitive to commodities may perform poorly.

However, Wilson expects this initial trend to be relatively mild. Aside from financial stocks, there has not been much fluctuation in the long positions betting on a Republican victory in October. Compared to the Trump administration, financial stocks may perform poorly in the short term under a Harris administration due to potential stricter regulations