Inside Markets — Election Outcome

The hedge fund community was light on risk coming into the election and will now likely re-gross as previewed. Short-dated election-related hedging will also need to be unwound. On Monday, the CBOE Index put/call ratio reached its highest level since September 24, 2021. Long only managers also reduced exposure into the election and find themselves with a reservoir of cash that could drag on performance into year-end amid bullish seasonal fund flows. In addition to fund flows, November and December are usually the strongest two month of the year for corporate stock buybacks. Implied equity volatility (VIX) quickly moves back to subdued levels below 20. The ‘year-end rally’ likely starts today with a rotation that could be more pronounced than most expect. At face value, the election outcome argues for a broad set of reflation and pro-cyclical trades that outperform this morning. Financials are a cyclical group that would also benefit from a presumed easing in regulations. Cyclical indices like the Russell 2000 (RTY) also outperform despite higher bond yields. For the moment, election results mean higher rates, higher yields and a steeper curve. Outside the US, we’d expect reflation tailwinds for US defense partner Japan, while China looks like it has the most downside exposure. The European economy is somewhat linked to China’s economic fate and also looks like some industries there could be on the receiving end of US tariffs.