The US presidential election on Tuesday is currently the number one event risk for US equities.  But investors should focus on two more important underlying themes: positioning and reflation.

Markets haven’t whole-heartedly embraced the reflation trade as money continues to pour out of equity funds.  Margin accounts saw a big outflow in 1Q20, but have seen most of this subsequently come back in, leaving equity holders neutrally positioned on this basis.

Charts Source: Bloomberg, Macrobond and Variant Perception

Within equities, sentiment and positioning is very mixed. While there are signs of local excesses, ie call option volume was recently surging in single-names again; this is paired with intense put buying at the index-level.

Charts Source: Bloomberg, Macrobond and Variant Perception

ETF investors are easing into cyclical areas with caution.

Charts Source: Bloomberg, Macrobond and Variant Perception

But banks and energy remain detested in the cyclical space. The latest BAML Fund Manager Survey shows that investors continue to reduce exposures to these two sectors.

We think these are key areas to be exposed to in the post-election world, irrespective of the presidential outcome. As we recently wrote last week, a recovering economy and a more tolerant Fed create an environment more conducive to reflation trades.

The caveat, as noted above, is these trades can only gain real traction when public fear is allowed to subside.