Goldman Sachs analysts have flagged a looming "pain trade" in under-owned European equities and U.S. small-cap stocks, specifically the Russell 2000, as institutional positioning remains light in these markets.
The firm's analysis points to easing bond market volatility as a catalyst for the expected squeeze. Reduced volatility typically encourages investors to move further out on the risk curve, rotating capital from safer assets into equities.
A "pain trade" describes a market movement that inflicts maximum discomfort on the largest number of market participants—typically those positioned against the emerging trend. In this context, it signals a move higher in these equities, catching underweight investors off guard.
Historically, a compression in bond market volatility, often measured by the MOVE index, correlates with increased investor appetite for riskier assets. Lower bond vol signals reduced uncertainty around future interest rates and economic growth.
For fixed-income investors, sustained reduction in bond volatility can lead to spread compression in credit markets, making higher-yielding assets, including equities, relatively more attractive on a risk-adjusted basis.
The Russell 2000 traded at $2,797 today, down 0.4 percent.
