Interview, Fireside Chat
Trends Shaping the Equity Markets
- Equity markets in the second half of the year are expected to continue exhibiting unprecedented volatility, with levels in the first half reaching or exceeding those of the 2008 global financial crisis.
- Central banks are anchoring short-to-medium-term rates, leading to muted interest rate, FX, and credit volatility, though equities are projected to bear the brunt of macro cross-currents.
- Technology's outperformance is attributed to low interest rates pricing future cash flows at a premium, though a potential rise in long-end rates could shift favor toward value sectors concentrated in Europe and India.
- The US election is anticipated to drive significant market impact, with historical data suggesting average three-month returns of +5% if the incumbent wins and -3% if they lose, though current conditions may diverge from historical trends.
- A potential democratic sweep carries the risk of tax reform unwinding previous changes, which could reduce S&P corporate earnings by approximately $20 per share (from $170 to $150), creating distinct winners and losers.
- Options markets are pricing in larger moves around the election, with uncertainty regarding outcomes or postal voting potentially extending the volatility window.
- A weakening US dollar is forecast if Europe achieves a smoother reopening and faster economic recovery than the US, driven by additional stimulus and socialization by European politicians.
- Global investors may hedge FX exposure by increasing allocations to European and Asian equities, potentially at the expense of US exposure, with a 10% depreciation of the dollar against the euro noted as a significant catalyst for global returns.
- The emergence of three leading vaccine candidates before the end of 2021 is a key variable, alongside the possibility that the "S" (social) component of ESG themes will garner increased focus.
- ESG fund flows reached $63 billion globally this year, including a record $14 billion in June, while Schwab opened six quarters' worth of accounts in Q3 and daily average trading across major retail brokers runs three to four times 2019 levels.
- Retail investor activity has surged, with Robinhood active accounts rising over 300% in three months and Tesla options trading near $200 billion, contrasting with institutional caution where gross and net exposures remain below last year's levels.
- A microcap company (ticker TLSA) has increased over fivefold since March, illustrating a trend of retail trading tickers rather than companies, whereas institutions are de-grossing books and running slightly less risk without needing pre-crisis position sizes given the current opportunity set.