investment viewpoints

What has driven the stock-market rally – and can it continue?

What has driven the stock-market rally – and can it continue?
Florian Ielpo, PhD - Head of Macro, Multi Asset

Florian Ielpo, PhD

Head of Macro, Multi Asset

Equity markets delivered positive returns for four consecutive weeks in November. The S&P 500 index rose about 9% last month, marking its strongest monthly performance since July 2022. There was no obvious reason for this rally, unless a slight miss of 0.1% in the October US Consumer Prices Index (CPI) report counts. But if not, what prompted this surge? In this weekly edition of Simply put, we investigate the forces behind the rally and what this means for its staying power.


Need to know:

  • The November rally came as a surprise, following a series of steady declines since mid-2023
  • To understand how durable this trend could be, we need to know which investor types are driving it
  • Analysing equity positioning, we identify which investor category has fuelled the rally – and ask whether they can sustain it


What type of investor is drove the rally?

There was no obvious reason for November’s strong equity performance from a macro point of view, nor from the perspective of valuations either. This suggests the rally was rooted in sentiment. Following the US inflation release, some investors fervently bought stocks. Such a situation begs the question: what type of investor is driving this trend? Among institutional, quantitative and retail investors, only the latter seem to have shifted their equity positioning in November, from defensive to positively exposed. What usually happens after retail players re-risk rapidly?


A tale of three investors

Equities undertook a steep decline from September until the last week of October. During this period, investors allocated more cautiously, reducing their exposure to stocks and prioritising cash. However, since the beginning of November, optimism among retail investors with regards to the outlook for equities has sharply risen.

Figure 1 shows equity positioning for retail, commodity trade advisor (CTA) and UCITS macro managers, and casts light on the origin of this renewed optimism. Retail investors, in particular, have sharply increased their exposure, shifting from low to highly exposed in a matter of weeks. On the other hand, UCITS Macro managers, which together serve as a proxy for institutional investors, have also increased their aggregate allocation to equities over the period, albeit by a much lesser extent compared to retail investors. Interestingly, CTAs, which could eventually be the reason for the stock market rally, have low exposure. Considering these dynamics, if the surprise rally can be attributed to one of these sources, it’s retail money.


FIG 1. Scored evolution of different investors’ equities positioning

Source: Bloomberg, LOIM. For illustrative purposes only.


Can retail investors sustain the rally?

Can the actions of retail investors explain recent equity-market performance? Figure 2 provides valuable insights into the relationship between investor positioning and average (annualised) equity performance. The charts show how during periods characterised by positive and increasing equity positioning, retail money tends to lead to a higher level of average performance among the three investor groups over the 2008-2023 period.

Equities performance, as shown, reaches approximately 25% on an annualised basis when retail money is increasingly positively positioned in the asset class. In contrast, CTAs exhibit an average performance of around 1%, while UCITS Macro managers contribute to an average of about 15%. When comparing such numbers over the 2008-2023 and 2020-2023 periods, the market impact of retail investors seems to almost double up. The approximate 7% performance of the MSCI World over the period is not inconsistent with these averages. Can this pattern create an enduring rise in returns?. This is less clear.


FIG 2. Average equity performance as a function of different investors’ positioning

Source: Bloomberg, LOIM. For illustrative purposes only. Past performance is not a guarantee of future success.


A rally that is here to stay?

What happens to average performance in the week following a positive or negative change in positioning? When examining the average performance following positive equity positioning, it becomes apparent that retail investors' higher equities exposure does not necessarily translate into future gains, as historical averages are close to zero.

In contrast, UCITS Macro investors exhibit a notable positive average performance of almost 6% in the week following their positive equity exposures, as shown in figure 3. This suggests that institutional investors have a more profound impact in driving longer lasting bull runs. Similarly, CTA investors’ shifts in allocation lead to an average performance of 3%. While retail investors may contribute to the overall market sentiment and momentum, their impact is mostly coincidental.

Given the strength of the November rally, be careful in preparing for what comes next!


FIG 3. Average performance of investors as a function of positive/negative positioning, in the subsequent week

Source: LOIM, Bloomberg. For illustrative purposes only. Past performance is not a guarantee of future success.


Simply put, the recent stock market rally has been primarily driven by retail investors' shift in positioning. Their impact on markets is usually not a long-lasting one – keep this in mind when considering the prospects for a Christmas rally.


Nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

  • Growth, on a global basis, has remained unchanged over the week. Our US indicator is hovering around the 30% recession threshold 
  • Inflation has declined worldwide, essentially reflecting falling inflationary pressures in the US
  • Monetary policy developments across the world show how the odds of a Federal Reserve pivot are currently rising rapidly.


World growth nowcaster: long-term (left) and recent evolution (right)

World inflation nowcaster: long-term (left) and recent evolution (right)

World monetary policy nowcaster: long-term (left) and recent evolution (right)

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The Nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

important information.

For professional investors only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This document is approved at the date of publication.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person. A summary of investor rights and information on the integration of sustainability risks are available at:

Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorized and regulated by the FCA. ©2023 Lombard Odier IM. All rights reserved.