Unusually upbeat investor sentiment is jeopardizing near-record stock market levels as it approaches the new year, Goldman Sachs strategists said on Monday.
Positioning for equities is at an "extremely tense" level as prices rise further than the fundamentals of equities, according to a note to clients of the group led by Arjon Menon. The bank's sentiment indicator, which tracks the positioning of shares among retail, institutional and foreign investors, on Friday reached two standard deviations above average, which is the 98th percentile since 2009. The last time the indicator reached this level was in September 2019, a few months before the end of the coronavirus. the longest-running U.S. bull market in history.
Indications above one standard deviation "historically indicated a stretched capital positioning," the team said. They added that such positioning tends to create obstacles to short-term profits when economic growth slows or stabilizes.
"The recent spike in covid hospitalizations and weaker-than-expected economic data thus increase the risk of a moderate pullback due to positioning next month," Goldman strategists said.
Shares are trading near record highs, and more recently they have fallen due to concerns about a delay in the stimulus package. Enthusiasm for President-elect Joe Biden's victory and progress in approving the coronavirus vaccine improved Wall Street's forecasts through November and helped shift investors' capital from rising stocks to riskier companies.
Despite the short-term risks, the team still adheres to the optimistic forecast of market profitability until 2021. The Bank has doubled its call for the S'amp;P 500 to 4300 by the end of 2021, which represents an increase of 16.3% compared to current levels. According to the team, the widespread use of the vaccine over the next year will lead to a V-shaped recovery, and any risks associated with stretched positioning will disappear in a few months.
In previous cases, when Goldman's sentiment indicator reached two standard deviations above average, the yield of the S'amp;P 500 was weak for the next one to four weeks, but almost always positive after two months, the bank added.
Even with the placement of shares at the current elevated level, strategists expect that investors will continue to transfer money from money market funds to the stock market. Monetary yields will stay close to zero for several years, and hopes for economic recovery will set stocks on an upward trajectory, the bank said.
The public and foreign investors are expected to be net buyers of U.S. stocks over the next year, with the former group set to push $100 billion into the market.