‘Animal Spirits’ may emerge after election, Barclays says

Investing.com -- Cross-asset markets are currently factoring in a high likelihood of a victory for Donald Trump and a Republican sweep in the upcoming US election.

According to Barclays strategists, this anticipation has led to stronger equity inflows and performance, but they warn of possible short-term volatility or a downside reversal if the election results are unexpected or unclear.

However, given that markets tend to resume upside after elections, strategists believe “the removal of uncertainty amid healthy US growth and global easing cycle could unleash animal spirits.”

“Nov-Dec seasonality is positive, buybacks are about to resume post blackout, and high cash allocation offers dry powder to investors,” they noted.

The investment bank also points out that equity futures positioning by asset managers has reached the highest point since early 2020, based on Commodity Futures Trading Commission (CFTC) data.

Nevertheless, the National Association of Active Investment Managers (NAAIM) survey indicates that overall active manager exposure has not reached summer peak levels, implying that not all investors are fully optimistic.

“Indeed, despite the strong rally in equities, investor sentiment is not euphoric, as wait-and-see prevails ahead of the US election,” strategists led by Emmanuel Cau explained.

The fear-greed indicator has seen a slight decline this month from its peak, though it remains above average. The American Association of Individual Investors (AAII) bull-bear index also indicates that sentiment has recently settled to average levels.

Barclays notes that the recent rally in US-led equities has seen limited investor participation. Trading volumes for the S&P 500 were notably lower in October compared to previous US election years. Furthermore, trading volumes in Europe have been weak throughout the year.

The firm also highlights that while bond exposure has decreased amid rising inflation expectations, benefiting equities, there is a risk that stocks might not stay unaffected if bond vigilantes emerge due to fiscal worries.

Rates instability is seen as a key risk leading into 2025, however, for the time being, positive economic surprises and resilient earnings provide a safety net for equities.

Source: Investing.com