Following market turbulence triggered by news related to Donald Trump, Tony Pasquariello, head of Goldman Sachs' hedge fund coverage business, offered a clear assessment: despite heightened short-term volatility and crowded investor positioning, the fundamental US economy remains sound, and the Federal Reserve is providing liquidity support, making the macroeconomic outlook "inherently favorable" for stocks. Strategically, the focus this year should be on buying during market dips rather than chasing rallies.
Market sentiment has undergone a dramatic shift from euphoria to anxiety since January. Although the S&P 500's realized volatility was just 6% at the start of the year, and the MOVE index, a gauge of bond market volatility, had fallen to multi-year lows, the market's feel has clearly changed this week. The back-and-forth news on tariffs, coupled with turmoil in the Japanese government bond market, has reignited volatility from extremely low levels.
Crowded investor positioning is narrowing the room for risk management. Whether among retail or professional investors, and whether in single stocks or index futures, nearly all positioning indicators are touching the upper end of their recent historical ranges. Simultaneously, the American Association of Individual Investors (AAII) sentiment survey shows investor optimism has reached its highest level since November 2024.
However, Pasquariello emphasizes that the core logic should not be ignored: US economic growth is accelerating, and the Federal Reserve is increasing liquidity supply. This combination is a key macroeconomic driver for equities over the medium term. He maintains a "cautiously bullish" stance, acknowledging that the current risk-reward profile is tricky, but believes that with entry at better price levels, stocks will still be supported by macroeconomic fundamentals.
The market has transitioned from extreme calm to volatility. January this year has become a classic case study in rapid market change. Prior to last Friday, major global asset markets exhibited unusual stability at the beginning of the new year. The S&P 500's realized volatility was a mere 6%, and the MOVE index continued its descent to multi-year lows.
But the situation reversed swiftly. Pasquariello notes that the pace of change in technology and geopolitics is "plainly startling," with multiple forces acting at an extremely rapid speed, creating tension and cross-currents. Financial assets have effectively become a public market referendum where major issues are debated and weighed. The market's feel has now shifted, and tail risks appear broader.
Two major risk factors are attracting attention. Among current risk factors, Pasquariello is more concerned about the ongoing impact of turmoil in the Japanese government bond market. Citing client observations, he points out that despite various twists and turns last year, the US Treasury market maintained remarkable stability, acting as an anchor for risk assets. Data shows that US 10-year Treasury yields at the end of each quarter last year were: Q1 4.21%, Q2 4.23%, Q3 4.15%, and Q4 4.17%.
He cautions equity traders to pay close attention to global fixed income markets, suggesting that stock risk exposure should be embedded with expectations for a steeper yield curve and a higher term premium. Additionally, the return of the "headline roulette" surrounding tariffs has become another uncertainty the market needs to digest.
Investor positioning is at historically high levels. Risks related to positioning warrant caution. Pasquariello points out that recent trading cohorts—including both retail and professional investors—have added significant risk exposure. Almost every indicator he tracks, whether for single stocks or index futures, gross or net exposure, is hitting the upper end of recent historical ranges.
Multiple sentiment surveys also indicate investors have moved into optimistic territory, with the AAII sentiment indicator reaching its most optimistic level since November 2024. Pasquariello states that these factors alone are not a "reason to run," but they do create a tactical situation with less room for error. At least in the very short term, he would not be surprised to see more risk transfer in the markets.
Economic fundamentals provide underlying support. Despite multiple short-term disruptive factors, Pasquariello stresses that core elements should not be overlooked: the US economic growth trend is upward, and the Fed is increasing liquidity supply. This interplay is a key macroeconomic driver for stocks over the medium term, distinct from the daily noise and news flow.
Last week, several data points stood out. The ISM Services Index rose to 54.4, its highest level in over a year; initial jobless claims fell to 198,000, a clearly healthy level; and various housing activity indicators showed signs of stabilization. Goldman Sachs' US Current Activity Indicator has risen to a level not seen since the end of 2024.
Goldman Sachs economist Joseph Briggs holds a very positive view of the US economic outlook. He expects approximately $100 billion to flow back to households via tax refunds over the next three months, providing support for near-term growth. Regarding policy rates, considering the new Fed Chair and expectations for core PCE to fall to 2.1%, interest rates are still expected to decline to 3%.
Strategy: Buy the Dips, Don't Chase Rallies. Pasquariello summarizes his stance as "cautiously bullish," acknowledging the inherent dilemma: when the market rallies, the "cautious" part seems conservative; when the market falls, the "bullish" part seems aggressive. Yet, he chooses to stick with this call.
Put more formally: an inherently favorable macro outlook should support US equities, but the risk-reward ratio remains tricky until better price levels are seen. He believes this year's operational strategy will lean towards buying on dips rather than chasing rallies.
The current market faces a contradiction: on one side are short-term disruptive factors like反复的关税新闻 (fǎn fù de guān shuì xīn wén), global bond market turbulence, and crowded investor positioning; on the other side are medium-term supportive factors like accelerating US economic growth and improving liquidity. This requires investors to maintain tactical caution while holding strategic confidence, seizing entry opportunities presented by market pullbacks.
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