Bank of America Warns: Short Trades May Cut S&P Returns by 23K%

Key Takeaway

• Short-term trading, especially with zero-day-to-expiry options now nearly half of S&P 500 option volumes, may limit investor returns.
• Holding S&P 500 investments for a decade reduces the odds of losing money from 46% to just 5%.
• Missing the 10 best trading days per decade since the 1930s could result in a gain of only 66%, versus a potential return of 23,000%.

Equity Investment Longevity

Equity investors are potentially limiting their returns by focusing on short-term trading, as highlighted by Bank of America analysts. The shift towards shorter trading horizons is evident, with zero-day-to-expiry options now making up almost half of all S&P 500 index option volumes, a significant increase from less than 5% a decade ago. The risk of loss decreases substantially with longer holding periods, dropping from 46% for a single day to just 5% over a decade. Furthermore, the importance of staying invested is underscored by the fact that missing the 10 best S&P 500 days per decade since the 1930s could result in a gain of only 66%, compared to the 23,000% return for those who remained invested.

Diversification and Market Timing

The Barclays PLC’s Equity Gilt Study reinforces the value of long-term equity investment and the critical role of diversification. Since 1925, equities have consistently outperformed inflation over any 20-year period, a trend that holds true in both the US and UK markets. The study, aligning with Jeremy Siegel’s principles in "Stocks for the Long Run," advocates for staying invested in equities despite market volatility. However, the recent decline in the equity risk premium suggests a need for caution in overweighting stocks, highlighting the complexities of asset allocation and the timing of shifts between asset classes.

BNPL Industry Insights

The "buy now, pay later" (BNPL) industry, expected to reach about $700 billion in transactions by 2028, offers consumers flexible payment options. Despite its growing popularity, especially among lower-income consumers, there are concerns about potential defaults and the regulatory response to the rapid expansion of BNPL services. Bank of America notes a slowdown in BNPL adoption among its customers, indicating a possible cooling effect that may not yet be reflected in macroeconomic data. The intersection of BNPL usage with rising credit card debt among heavy users points to potential financial vulnerabilities.

Bond Market Dynamics

Investor appetite for longer-dated US bonds has surged, with a Bank of America survey showing 49% of respondents viewing being long rates as their top trade. This shift follows Federal Reserve Chair Jerome Powell's less hawkish remarks and a soft US jobs report, leading to expectations for Fed rate cuts as early as November. The recent $25 billion 30-year Treasury auction saw strong demand, indicating a bullish outlook for Treasuries. This enthusiasm is part of a global trend, with a significant increase in global bond fund inflows and a bearish outlook on the Japanese yen amid skepticism about Japan's foreign exchange interventions.

Street Views

• Analysts at Bank of America (Neutral on short-term trading strategies):

  "Trading horizons are getting shorter, with zero-day-to-expiry options now accounting for almost half of all S&P 500 index option volumes, up from less than 5% a decade ago. But the odds of losing money in the S&P 500 drop from 46% for holding a position for a single day to 5% for carrying those investments for a decade... Timing the market is especially fraught. Since the 1930s, missing the 10 best S&P 500 days per decade would have yielded a gain of 66%, versus the 23,000% return they could have got if they remained invested."