Some on Wall Street see a sharp reversal hitting this year’s stock market rally now that fast-money quants have ramped up their speculative bets.
But the real money has the potential to come in and lead even if these systematic players slow down.
Tepid inflows into mutual funds and exchange-traded funds, coupled with lots of cash in safe assets, suggest there is plenty of money to power this New Year rally, according to Goldman Sachs Group Inc.
The upbeat projection is a counterpoint to warnings that extreme positioning among quantitative funds with echoes of the February 2018 peak is setting up equities for a fall.
“There may still be room for a more bullish rotation alongside the better growth/rates mix we expect,” Goldman strategists wrote in a note Tuesday.
The bank is not alone in flagging the opportunity for investors to play catch-up, with Ray Dalio encouraging the risk-on move this week. “Cash is trash,” the Bridgewater Associates LP founder said in an interview with CNBC at the Davos conference. “Get out of cash.”
Flows into stocks have trailed the advance in risky assets, with the divergence between equity-fund intake and market performance last year among the largest on record, according to Goldman.
Deteriorating business-activity indicators and the strong Dovish pivot from central banks supported allocations into high-quality debt and money-market funds in Y 2019, while curbing equity inflows despite double-digit market returns.
Some of that has only recently begun to change.
“Cyclical sectors have attracted inflows for the 1st time after almost 2 years, while defensive equities such as low vol stocks have started to see some outflows,” the strategists wrote.
Meanwhile government bonds and money markets have yet to see outflows, suggesting “a large portion of positioning has still not moved into equity,” according to Goldie’s note.
At this point, the bank remains in a camp that might best be described as mildly bullish. Goldman’s David Kostin has a Y 2020 year-end forecast for the S&P 500 of 3,400 — the median among Wall Street strategists tracked and a mark about 2.4% above where it is now, we see it somewhat higher.
Thursday, the major US stock market indexes finished at:
DJIA -26.18 at 29160.00, NAS Comp +18.71 at 9402.50, S&P 500 +3.79 at 3325.54
Volume: Trade on the NYSE came in at 949-M/hares exchanged
- NAS Comp +4.8% YTD
- S&P 500 +2.9% YTD
- DJIA +2.2% YTD
- Russell 2000 +1.0% YTD
HeffX-LTN’s overall technical outlook for the major US stock market indexes is Bullish to Very Bullish in here.
Investors will not receive any notable economic data on Friday
Have a terrific weekend