Wall Street's biggest trading desks bet that the stock-market rally would resume after the election. On Thursday, that call backfired spectacularly. Trading desks at JPMorgan Chase & Co., Citadel Securities and UBS Securities had said the midterm vote would be a clearing event for jittery markets.
With plenty of cash on the sidelines, investors would rebuild positions. While stocks advanced on Wednesday after Democrats swept the elections, anxiety around the artificial intelligence trade wiped out $2.3 trillion from the Nasdaq 100 Index the next day. The S&P 500 plunged 4.4%, with every sector finishing the day in the red.
Goldman Sachs Group Inc.'s equities trading desk had one of its busiest sessions on Wednesday, according to John Flood, head of Americas equities execution services. Thursday was "the exact opposite," he wrote in a client note. "Our phones are exploding with asks for color. Unfortunately we aren't seeing much." The long-only investment community was "frozen" again.
Investors had aggressively reduced stock exposure ahead of the midterms and were caught off guard by Wednesday's rally. Hedge funds were now selling some of the AI hyperscaler stocks they had bought the day before. The bullish calls ahead of the vote had been tied to the idea that investors were positioned defensively, and removal of election uncertainty could encourage them to rebuild exposure.
Hedge funds cut equity risk in October at a pace not seen since March, according to Goldman's Prime Services desk. Scott Rubner of Citadel Securities said the election could help clear the way for a year-end advance. UBS Securities' Davide Montoni argued the vote could provide an upside catalyst after volatile technology stocks.
Barclays Plc's Alex Altmann was one of few skeptics, warning the midterms were unlikely to resolve biggest pressures on equities, such as AI's payoff and financing costs. The scale of Thursday's decline was amplified by systematic strategies following market direction rather than fundamentals.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing