Quant funds, those that rely on algorithmic or systematically programmed investment approaches, account for roughly 25% of all all U.S. stock trades. Some estimates place that percentage closer to 50%. Either way, the quant fund impact is substantial.
It follows that if quant funds are dramatically reducing stock exposure, they’re deciding that the near-term prospects for the 2020 stock bubble are bleak.
In a similar vein, downgrading the debt ratings of corporations all but insures higher average borrowing costs. That will hit bottom line profits. It will decimate stock buyback schemes. And, in some cases, companies will find themselves defaulting on obligations.
Debt downgrades, then, will continue to pound stock prices.
A third area of concern? The global financial system itself.
If the global financial system were healthier, one would not expect “financials” to significantly underperform the broader S&P 500 over 2 years. Yet even after an epic 3-day rally, European financials are still down 40% and the U.S. Financial Sector SPDR (XLF) is still down 20%. That compares with flatness for the S&P 500.