The Zhitong Finance App learned that if what they are most worried about doesn't happen, investors who are very concerned about the next few weeks or risks may be caught off guard. The volatility of stocks, bonds, and currency options has increased as investors pay higher prices for protection. Risks are obvious, such as the highly competitive US election, US and European interest rate decisions, the threat of an escalating conflict in the Middle East, and the advent of earnings season. In the stock market, implied volatility exceeds actual fluctuations, and put options to prevent sell-offs are more popular than bullish call options.
Charlie McEligott, a cross-asset strategist at Nomura Securities, said last week that “due to a series of simultaneous events, risk management forces buyers to over-hedge.” “Investors everywhere are obsessed with the left-hand side of the 'worst case'.” He added that judging from statistics, the market always performs well when there is such excessive hedging, and the median stock market value will rise 13% after a year.
Although various indices hit record highs, the impact of volatility in early August was still felt, and market participants had yet to return to the calm level of the first half of this year. At that time, hedging was seen as a drag on market performance. Trading is generally sluggish, and some investors have even withdrawn their capital: Last week, the nominal value of open positions on Nasdaq 100 futures dropped by $5.7 billion in a single day.
However, if the market withstands the test of November's events, with only ripples rather than a tsunami, traders may find themselves setting up too much protection and too little exposure, leading to another situation where they are chasing gains.
The problem of underperforming hedging portfolios is already beginning to show: since August 5, Invesco S&P 500 downside hedge ETFs have declined 1.1%, while the SPDR S&P 500 ETF Trust Fund's total return is 13%. When the protection is lifted or has just expired, the other trader who needs to adjust the transaction book will increase the purchase.
Although the Chicago Board Options Exchange Volatility Index and other option cost indicators are still high, the one-month volatility of the S&P 500 index has dropped by more than half since mid-August, to close to a three-month low. Lower data, particularly after sharp fluctuations in early August and exit calculations, will attract systemic investors back to the market, forming another impetus. Nomura Securities estimates that this group alone could buy about $160 billion in stocks over the next three months.
The wave of US corporate buybacks will resume in less than two weeks, with billions of dollars of shares being bought back every day, adding another layer of bullish momentum. According to announcements from previous years, Birinyi Associates estimates that more than $1 trillion of repurchases will be completed in 2024 and 2025.
All of this is likely to unfold in the last quarter of this year, when liquidity usually decreases and markets tend to rise.
There are signs that investors are starting to prepare for the year-end rally. Over the past week or so, traders bought more than 100,000 copies of the December $615 SPDR S&P 500 ETF call options, which are currently over 5% higher than the market.
Scott Rubner (Scott Rubner), managing director of Goldman Sachs Global Markets and a strategy expert, wrote in a report to clients last week: “The sell-off in the stock market was cancelled. As institutional investors are now forced to enter the market, customers are shifting from left-tail hedging to right-tail hedging, and the rebound at the end of the year began to reverberate.” He added that professional investors are increasingly worried that their performance will fall seriously behind the benchmark.
Historically, from October 15 to the end of December, the S&P 500 had a median return of 5.2%. Goldman Sachs data shows that in the election year, this figure was just over 7%, which meant the year-end level was 6,270 points. Data compiled by Bloomberg shows that in the nearly one-century history of this data, only 25 years of the stock market showed negative returns in the fourth quarter.
Although analysts expect profit growth of only 4.3% in the third quarter, which is far lower than in previous quarters, the US earnings season generally had a positive start, and most banks reported better-than-expected results. Thomas Hayes (Thomas Hayes), chairman of the investment company Great Hill Capital, pointed out that the liquidity granted by the Federal Reserve also strongly supports the stock market.
Hayes said, “This is probably October, the first election year with very limited fluctuations. Will we be hit normally before the election, or will we barely get through?”