Goldman Sachs traders exclaimed that the current trading is rare: I don't remember the last time the "fear index" exceeded 20, and clients are all bullish

As the countdown to the U.S. presidential election begins, perhaps Warren Buffett's famous saying is proving true once again: Be fearful when others are greedy. Recently, Goldman Sachs traders discovered a rare phenomenon in their careers: when the "fear index" VIX, which measures U.S. stock volatility, is high, clients are actually bullish on U.S. stocks.

In response to questions about which funds are flowing as the year-end approaches and what trades clients in Goldman Sachs' franchise business have made, Brian Garrett, Managing Director of Cross-Asset Derivatives Sales at Goldman Sachs, said,

"I don't remember a time when the VIX was above 22 and the client base was uniformly bullish... The economic and growth data is strong, and people believe inflation is basically under control... The election is a worrying wall, but the peaceful transition of power combined with a re-adjustment of volatility could potentially trigger another wave of risk trading before the end of 2024."

Garrett noted that a common approach he hears in conversations with investors is, "We are going long and will deploy more capital after the election." If you are part of the entire camp, you are not alone. The implied volatility for the S&P 500 is 2%, for the Nasdaq 100 it is 2.5%, and for the Russell 2000 it is 3.6%. These are reasonable hurdles that options buyers need to overcome, so most hedging is done in a delta form.

Garrett believes that the most interesting trades after the election will be in individual stocks/themes. Different election outcomes will have a significant impact on industries and sectors, but may also lead to diversified index trading remaining relatively flat.

Garrett mentioned that he likes to trade against a steep VIX curve, such as buying VIX November put options with funds from VIX December put options. He also likes to take advantage of the upside potential in gold (Goldman Sachs research remains very bullish on gold) and seeks individual stocks that could benefit from regulatory easing or mergers under the next government.

Garrett believes that small-cap stocks will not replicate the outstanding performance seen after the 2016 election, stating, "In fact, I think the 2016 script did not 'play out' as some people believe."

John Flood, Head of U.S. Equity Execution Services at Goldman Sachs, found that hedge funds continue to trade "Republican policy winners" at an extremely high pace. Flood believes that if Democratic candidate Harris is elected, it will lead to a sharp unwinding of this recently increased risk exposure, putting heavy pressure on broader indices, such as a rapid 5% drop in the S&P 500.

Flood pointed out that 22% of the total assets under management in mutual funds ended their most recent fiscal year in October. Earlier in October, Goldman Sachs observed significant tax-related sell-offs among several members of the tax loss selling basket (GSCBMF24 INDEX). The underlying assets here are worth noting, as there are some interesting buying opportunities Goldman Sachs' head of cross-asset sales, Jon Shugar, stated that investors are currently managing to reduce their total and net exposure ahead of the election. Regarding the post-election market, investors remain confident about the upside potential of gold (both direct and related mining) and the potential benefits of financial deregulation.

Shugar mentioned that most investors he spoke with hope to increase their risk in U.S. stocks after the election. Concerning the election results, Shugar still believes that the pricing in foreign exchange trading is incorrect, whether it is a weaker dollar due to Harris's election or a decline in the euro against the dollar due to Trump's election—both scenarios are possible. The biggest question may be the ultimate direction of long-term interest rates.

Chris Spahr, Goldman Sachs' head of synthetic sales trading, noted that about a month ago, clients' views were to "reduce risk" and "wait and see" until the election results were announced. Now the situation has completely changed—clients have made decisions and are starting to take an aggressive stance on Trump trades (shorting the tariff basket, going long on Republican policy theme baskets, and going long on cryptocurrency ETFs). As Trump's advantage grows, the Senate presents a tough battle for the Democrats— the Republican takeover of Congress seems increasingly likely.

Lee Coppersmith, head of derivatives sales at Goldman Sachs, stated that previously, clients were focused on adjusting their portfolios in response to a Republican-dominated election outcome, but fund flows are now shifting in the opposite direction. Goldman Sachs is seeing an increased demand for sectors leaning towards Democratic policies, such as solar/renewable energy and bond substitutes. On the other hand, driven by deregulation and favorable mergers and acquisitions, Goldman Sachs' trading desk still believes there is significant value in certain financial sectors