Investors who had reduced their equity exposure during the market volatility in early August significantly increased their holdings as global stocks rebounded last week, according to data from Deutsche Bank.
In a reflection of how quickly markets have recovered from the earlier sell-off, discretionary investors—those who decide when to buy or sell based on market conditions—sharply increased their positions last week, fully recovering the declines from the previous week. Their holdings are now above average levels once again, Deutsche Bank noted in a report on Monday.
The resurgence in confidence saw substantial cash flows into index options, megacap technology stocks, and both cyclical and defensive sectors.
Trend-following portfolios, including “volatility control” funds—which typically buy when markets are stable and sell during turbulent periods to limit losses—also significantly raised their equity exposure. However, their positions remain below historical maximums, Deutsche Bank added.
This swift return of investor confidence comes just two weeks after global stock markets experienced sharp declines due to rising fears that the U.S. economy was headed for a recession.
At the same time, a sharp appreciation of the Japanese yen accelerated the unwinding of the “yen carry trade,” leading to the steepest one-day drop in Tokyo’s stock market since Black Monday in 1987. In both Japan and the U.S., where megacap tech stocks were hit particularly hard, the sell-offs were worsened by the rapid exit from a few heavily crowded trades.
“Within just two short weeks, the U.S. equity markets appear to have made a full recovery,” said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets.
Global equity markets recorded their best weekly performance since November last week, as volatility eased and a series of stronger U.S. economic data helped alleviate fears of an impending economic slowdown.
On Monday, Wall Street’s blue-chip S&P 500 index closed up 0.97%, ahead of this week’s Jackson Hole meeting of central bankers from around the world. The index is now less than 2% below its all-time high in July.
“Even the perennial bears would have struggled to find much in last week’s data to support recent recession fears,” said Neil Shearing, chief economist at Capital Economics.
Fed funds futures now indicate that investors expect the Federal Reserve to implement four quarter-point interest rate cuts by the end of the year. Just two weeks ago, some were anticipating an emergency half-point cut before the Fed’s September meeting.
Credit investors also appear to be optimistic, with the majority expecting a “soft landing” for the U.S. economy, according to a Bank of America survey.
Three-quarters of respondents now believe that U.S. inflation will slow without triggering a recession, marking the highest level of confidence in a soft landing scenario on record, BofA reported on Monday. The survey also found that while geopolitics remains the top concern, central bank policy mistakes are now a close second.
BofA surveyed 48 clients—including banks, insurance companies, pension funds, asset managers, and hedge funds—in both high-grade and high-yield credit markets over the four days leading up to August 16.
“Recent market turbulence has only reinforced investor belief in a ‘Goldilocks’ macroeconomic environment,” BofA concluded.