The election of Donald Trump as President has triggered a significant rally in the stock market, sending buy signals to rule-based investment funds and further boosting the market's upward momentum. Prior to the election, Wall Street was bracing for potential volatility, but Trump's victory led to the second-largest single-day drop in the VIX index since 2021, while the S&P 500 index rose by 2.5%.
This market behavior forced systematic funds to rebalance by investing in stocks, creating a technology-driven feedback loop that further fueled the stock market's climb. According to Goldman Sachs tactical expert Scott Rubner, a year-end rally appears to be commencing and could exceed investor expectations. He cited factors such as the unwinding of election hedges, re-leveraging, buybacks, FOMO, and option contract-related purchases.
Analysis from Nomura Securities International indicates that volatility control funds are expected to purchase $50 billion in U.S. stocks over the next month, with total purchases reaching $110 billion by January. Additionally, risk parity funds are predicted to significantly shift towards global equities. Rubner believes both types of funds are likely to make substantial stock purchases.
Risk-managed funds, typically driven by volatility signals rather than fundamental factors, are very sensitive to daily price fluctuations. They tend to reduce risk exposure during market turbulence and increase it when volatility subsides. The recent market surge signaled such a shift, allowing funds to increase risk after reducing stock exposure amid election uncertainty.
Other technical factors also played a supportive role. Morgan Stanley's Christopher Metli reported that funds using derivatives to enhance returns on specific companies or indices might generate around $15 billion in stock purchases. Given the focus on tech stocks, these funds could particularly boost the tech sector, notably semiconductor companies.
Furthermore, to balance options books, Wall Street dealers might purchase $5 billion in stocks. According to Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, investors had hedged before the election, and these hedges may gradually diminish or be sold off.
