Mark Wilson, head of the trading department at Goldman Sachs, stated that despite recent sharp market volatility, investors should not overinterpret this "position washout," as the core drivers that have propelled the market year-to-date have not undergone any substantive change.
The market set multiple extreme records this week. Microsoft suffered its second-largest single-day market value loss in history, SAP plummeted 16%, and silver plunged 30% in a single day. The nominal trading volume of the silver ETF SLV exceeded $32 billion, while the gold ETF GLD saw turnover surpass $30 billion for two consecutive trading sessions. Silver volatility surged to extreme levels only seen during the global financial crisis and the COVID-19 lockdowns.
In his weekly report, Wilson pointed out that when assessing the severity of this adjustment, it should be compared with the gains since January. He emphasized that key variables—such as the continuation of the US dollar's trend, undiminished enthusiasm for AI investment, strong US economic growth momentum, and geopolitical realignment—have all remained unchanged. The market's performance year-to-date still reflects these core trends: rare earths are up 35%, nuclear energy stocks are up 21%, and European defense stocks are up 20%.
The immediate trigger for this adjustment was excessively crowded investor positioning. Total exposure had reached extreme levels at the 99th percentile, and the performance of systematic quantitative strategies indicated that crowding had become a prominent issue. Wilson believes this rapid pullback is more of a technical correction rather than a shift in fundamental logic.
Large-cap stocks experienced record-breaking severe volatility. The magnitude of market swings this week was staggering. Microsoft fell 10% in a single day, suffering its second-largest historical loss in market value, but simultaneously recording its highest-ever nominal trading volume. SAP's 16% plunge was also accompanied by record trading volume. On the upside, gains were equally astonishing, with Meta rising 10% and Verizon soaring 11%.
Volatility in the precious metals market was even more extreme. Silver plummeted 30% in a single day, with SLV ETF volume exceeding $32 billion. The GLD gold ETF saw turnover exceed $30 billion for two consecutive trading days. Wilson joked during an earlier conference call this week that he introduced the head of metals trading as the "head of meme stock trading," but noted that even meme stocks had never seen such enormous trading volumes.
Silver volatility surged to levels only witnessed during the darkest days of the global financial crisis and the COVID-19 lockdowns. This extreme volatility reflects a collision of leverage, retail frenzy, and momentum chasing.
The core drivers from the start of the year remain unchanged. Wilson stressed that, from a big-picture perspective, the largest variables and drivers that have propelled the market year-to-date have not truly changed. The US dollar trend continues to extend, and its subsequent evolution will be fascinating to watch as dollar prices challenge their millennial range and the incoming Fed Chair begins outlining their policy path.
Focus on AI remains fervent, evidenced by expanding capital expenditure intentions. Meta's capital expenditure for the year now stands at $180 billion, signaling disruptive impact ahead. All signs point to continued robust US economic growth momentum. The evolving geopolitical order is driving a new prioritization of "sovereignty," spanning defense, supply chains, and industrial capacity. The year-to-date market scoreboard reflects these key trends—rare earths up 35%, nuclear energy stocks up 21%, European defense up 20%, copper miners up 18%, US defense up 17%, and high-beta 12-month winners up 17%. No trade better captures the sentiment around currency debasement, reflation, and geopolitics than silver and gold.
Excessively crowded positioning triggered the adjustment. Wilson pointed out that the extreme nature of investor positioning cannot be ignored. Total exposure data shows that after a period of impressively strong, broad-based returns, investor positioning had expanded significantly. While net exposure and long/short ratios were less concerning, crowding indeed became a problem, as seen in the year-to-date performance of systematic quantitative strategies. Semiconductors and semiconductor equipment now account for 12% of hedge funds' net risk exposure. Two years ago, this figure was just 1%, while the software sector has declined from 18% in 2022 to just 3% today. Expenditure by hyperscale cloud providers has been revised upwards again, positioning is at record extreme levels, and semiconductors remain the primary focus.
Wilson stated that although January added many new macro discussion dimensions—including US liquidity issues, significant yen interest rate volatility, the Fed's "rate check," inflation concerns sparked by rising commodity prices, and heightened Middle East uncertainties—none of these factors should obscure the fact that investor positioning had become overextended. Therefore, the severity of this adjustment should be assessed relative to the magnitude of gains since the start of the month.
Adhering to six core annual views. One month into the new year, and despite a flood of new information, Wilson said he remains committed to the six core views established for the full year back in mid-December. First, the AI story in markets has moved past the "end of the beginning" phase. The narrative that most AI value creation accrues to large language models, and the broad-based bull market for all things AI, is likely over. The identification of beneficiaries is about to become much more selective. Second, the appointment of the incoming Fed Chair could prove a key market event, and one should continue hedging against the prospect of fiat currency debasement and a weaker US dollar. Third, copper's breakout to record highs is justified for good reason; hard assets hold a very valuable place in portfolios, especially those linked to infrastructure demand trends. Fourth, given the existing market landscape, diversification is now the price worth paying to be fully invested in equities, both geographically and across factors, as 2025 has already demonstrated. Fifth, European large-cap stocks are not synonymous with European macroeconomics, and the prospects currently priced into European equities are already quite bleak. Sixth, a question requiring ongoing attention is: "Are the conditions for an equity market bubble present?" Additionally, Wilson highlighted three emerging themes. UK real estate stocks are trading at a discount of over 30% to net asset value, with virtually no new office and retail supply, and rents have correspondingly inflected upwards. Second, European equities struggle to make much headway on an aggregate level when the US dollar weakens, due to the significant drag on earnings per share. Third, semiconductors and semiconductor equipment now constitute 12% of hedge fund net risk, while software has declined from 18% in 2022 to just 3% today; at some point, selecting for consistency within these trends will create genuine opportunities.
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