UBS Head of Equity Derivatives Research Stuart Kaiser joins Yahoo Finance Live to discuss how markets are faring amid pandemic.
JULIE HYMAN: And a lot of various indicators that people are watching this morning. We've got the Bank of America Fund Manager Survey. And in that survey, atop that survey, I should say, they wrote, the only reason to be bearish is there is no reason to be bearish. There's also a JPMorgan indicator that looks across asset classes that finds there's a lot of complacency out there.
Is that alone enough for concern? Stuart Kaiser is joining us now to talk about this. He is UBS Head of Equity Derivatives Research. Stuart, it's good to see you. So talk to me about what you're seeing out there. Does it feel like people are too complacent slash too bullish out there right now? And are stocks vulnerable to a fall of some kind?
STUART KAISER: Hi. Good morning, Julie. It's a great question. I think it depends on what indicators you're looking at. On Friday, the VIX first it's close below 20 for the first time since the crisis started. So I think that got a lot of folks' attention of, you know, are we out of the woods, and are we kind of past this risk event.
Our view is we're not quite there yet. I mean, things have certainly improved. The VIX is down. Other indicators of risk in positioning to make it look like folks are pretty bulled up and positive about the market. You might argue that they should be, given the amount of earnings and GDP growth that we expect and the amount of stimulus in the system.
I think the easiest way, from our perspective, to look at it is to say, even though the VIX is low, if you look at the pricing of volatility a little bit further out, three, six, 12 months out, those metrics still remain quite high. And I think that suggests to me that there is still a little bit of uncertainty and caution, at least on the part of institutional investors.
While I think retail and pension funds and long-onlies have been very happy to invest in the market pretty aggressively since the vaccine news came out at the end of November, I think the institutional community is still a little bit cautious. And to me, that's actually quite bullish because it means as that risk gets priced out of the system, that should be, on net, positive for equity markets.
MYLES UDLAND: Right the you saw the opening bell here on this Tuesday morning. SUBZ, a streaming ETF ringing the bell. Not a SPAC, although it does feel like every other day it's a SPAC ringing the bell.
Stuart, I want to ask you a bit about that retail bid and the role that it's played in the market. Since the last time that we spoke to you, obviously, the entire GameStop storm came and went. And I think we're sorting through what that means, what it doesn't mean. How you've been talking through that with some of your clients and some of those dynamics that you guys are seeing as real and maybe the others that are kind of imagined parts of this narrative?
STUART KAISER: Yeah, good morning. I think it's quite important. And clients are acutely focused on the amount of retail participation in the market and also in the options market. I think what's quite interesting there is they tend to behave a little bit differently than a retail-- excuse me, than an institutional investor would. At least in the option space, retail investors tend to be quite short-dated, tend to focus on call options, and are probably a little bit more sensitive to the dollar price of the option, as opposed to the implied volatility, which is what a trader might look at.
So I think we've seen on two occasions, in January, and then also back in September, I think we discussed this relative to the NASDAQ, where you had really aggressive retail participation. And that was able to push volatility up and I think get the market's attention from a risk perspective. So that participation is there. It's real. It can impact the markets.
It doesn't feel like it's something that's happening every day. It's a bit more episodic. It tends to be, I think, related to pockets of the market, whether those are single stocks, or I think silver was a discussion point the last couple of weeks as well. So from our perspective, it is a real flow. And it can impact pricing. But I think it is harder for retail investors to effect true large cap stocks in a negative way.
GameStop and some of the other stocks you mentioned are a little bit smaller market cap. They have a much higher short interest. So I think when retail gets involved in those stocks, they can really be very disruptive.
In large cap tech, like we saw in September, there wasn't as much a disruption as we saw most recently. So if we take a step back, we do think that is a real flow. We do think it's important to the markets, particularly episodically. But you need to, I think, understand what they're trading and how they're trading. And I think Wall Street has gotten a little bit more comfortable with that. So you would hope on a go forward basis, it would be kind of less surprising is the way I'd put it.
BRIAN SOZZI: Stuart, what are some of the most crowded trades in the market you're seeing right now?
STUART KAISER: It's a great question. I think if you look at what's performed well, it's going to be value, cyclicals, small cap, emerging markets. Some combination of those are where we've seen the most interest from investors. The last week or so, I think interest in Europe has started to pick up. And I think that that's sort of a result of what I just mentioned, which is small cap and emerging markets have performed so well that it's given people a little bit of pause to buy those trades at a time when they look pretty elevated. And that's gotten, definitely, people focused on Europe a little bit. So those are the areas I would focus on.
If you took a step back, the most crowded trade we've seen over the last 18 months has probably been large cap tech. But I think folks are happy to hold those stocks and kind of hold them through the cycle.
If you look at what had gone on in cyclical sectors of the market, so financials, energy, materials, and small cap and potentially emerging markets, at least from an options perspective, the activity we had seen had been very tactical in nature. So it almost looked like people were renting exposure to those trades for a short period of time, as opposed to getting fully invested in them. And I think that's going to be the test as we move ahead here for the next month or so is, can the momentum in those trades sustain itself? And if so, does that then spill over into things like Europe that have lagged pretty considerably?
JULIE HYMAN: And Stuart, just quickly, I'm going to take the other side of that. Are there trades that you have seen spring up that are sort of newer that are showing bearishness? Are there any? Does that even exist right now, pockets of bearishness?
STUART KAISER: We haven't seen a whole lot of bearishness in the equity market, for sure. I think when you have these rotation trades going on, it can feel bearish for part of the market. There was a period of time early in the year where I think tech folks felt there was a bearish tone to their market. But they were still up, which is quite interesting.
So I think bearish news these days is when you're underperforming as opposed to where you're trading lower, just because we haven't seen a whole lot of trades perform poorly in absolute terms. I think there is some caution in sort of the high-yield space, in maybe part of commodities, certainly in parts of the bond market. I think there's some concern there that yields are rising. And that could create some negative returns. But in equities, it hasn't been a question of bearishness. It's been more of a question of how bullish you are.
So again, Europe is probably the area that's underperformed the most relative to where you might have expected it to be, given the performance of other parts of the market. But by and large, I think folks are pretty comfortable with equities, just because vaccine rollout seems to be going well, fiscal and monetary stimulus are quite large, earnings season was strong, and it looks like GDP growth and unemployment are going to continue to improve.
So to your point earlier, is the reason to be bullish just that nobody is, I think that's the natural kind of tendency of institutional investors is to worry what's around the corner. But big picture, the markets are feeling pretty good here. Risk is feeling pretty good.
JULIE HYMAN: Yes. They're not trading as though they are seeing bogies around the corner. Stuart Kaiser, UBS head of equity derivatives research, always good to see you. Stuart, thank you.