The year-end rebound has begun! Trump has completely ignited Wall Street sentiment, and various funds will flock to buy U.S. stocks
Trump's victory in the presidential election triggered a surge in the stock market, with rules-based investment funds issuing buy signals, driving the market higher. The VIX index recorded its second-largest single-day drop since 2021, and the S&P 500 rose by 2.5%. Goldman Sachs experts predict that the year-end rebound may exceed expectations, with volatility control funds expected to purchase $50 billion in U.S. stocks next month, and risk parity funds will also shift towards global equities. Morgan Stanley anticipates that derivative funds will generate approximately $15 billion in buys by the close on Wednesday
The Zhitong Finance APP noted that the stock market surge triggered by Trump's presidential election victory sent a buy signal for rule-based investment funds, adding momentum to the market rally.
On the eve of the election on Tuesday, Wall Street had been preparing for the potential turmoil that could arise post-election.
In contrast, Trump's apparent victory drove the VIX index to record its second-largest single-day drop since 2021, while the S&P 500 rose by 2.5%. These moves forced systematic funds to rebalance by putting money into stocks, creating a technically driven feedback loop that added to the forces pushing the market higher.
Scott Rubner, a tactical expert at Goldman Sachs, wrote in a report to clients on Wednesday, "The year-end rally starting today could be higher than investors expect." He cited buying behaviors linked to options contract expirations, such as "election hedge unwinding, re-leveraging, buybacks, FOMO, and Vanna."
Nomura Securities International's analysis indicated that volatility-controlled funds are expected to purchase $50 billion in U.S. stocks next month, with total purchases reaching $110 billion by January. This Japanese bank also predicted that so-called risk parity funds would significantly shift towards global equities. Rubner also believes that both types of investment vehicles could make substantial purchases.
Risk-managed funds are typically driven by volatility signals rather than fundamental factors and are extremely sensitive to changes in daily price fluctuations. When market turmoil occurs, they often suppress risk exposure, while they take the opposite approach when volatility decreases.
Wednesday's rally marked this shift, as Wall Street prepared to deal with potential ongoing volatility if there were still questions about the election results, allowing funds to increase risk after reducing stock exposure.
Other technical factors also played a supporting role. Morgan Stanley's Christopher Metli wrote in a report to clients on Wednesday that funds using derivatives to enhance returns for specific companies or indices were expected to generate about $15 billion in buying by the close on Wednesday. Given the large number of funds focused on tech stocks, this capital is most likely to boost technology stocks, especially semiconductor companies.
Additionally, according to Metli, Wall Street traders may purchase $5 billion worth of stocks on Wednesday to balance their options books.
Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, stated, "Investors hedged ahead of the election. These hedges will either gradually fade or be closed out."