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- Investor allocation to stocks is stretched to near-historic levels, which could lead to a minor 1% to 2% decline in stocks in the short-term, Goldman Sachs said in a Monday note.
- But in the medium to long term, there is still room for investors to buy more stocks and drive the market higher due to heightened money market fund balances, according to Goldman.
- With cash yields near zero and bonds offering little yield, expect investors to rotate the cash into stocks, helping fuel a 16% gain in the S&P 500 next year, Goldman said.
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Investors allocation to stocks is high, which could result in a short term market pullback as the worsening virus situation in the US “could spur a positioning unwind,” Goldman Sachs said in a note on Monday.
“Stretched positioning has been a headwind to equity market returns only in the subsequent 1 to 4 weeks,” Goldman explained.
But despite a limited sample set, stock returns were almost always positive two months after investor positioning to stocks hit stretched levels.
Current allocation to stocks is in the 97th percentile since 1990, Goldman highlighted, with a total 48% of investors holding stocks, which includes households, foreign investors, mutual funds and pension funds.
But there is still room for upside in both investors allocation to stocks and the stock market in general, Goldman highlighted, pointing to heightened cash balances, increasing chances of a fiscal stimulus deal, and the imminent rollout of a COVID-19 vaccine.
Heightened cash balances is best illustrated by $5 trillion in assets in money market funds, which is still about $1 trillion higher than they were at the start of 2020, and almost $2 trillion higher than they were before the most recent Fed hiking cycle.
That cash is likely to be diverted into stocks given the near-zero yield on cash and bonds, according to the note.
"We estimate that household selling of US money market funds could exceed $500 billion and a meaningful amount of that could be directed towards equities," Goldman said.
If this scenario does in fact play out, it would likely put Goldman's 2021 projection of stock market returns within reach. The firm expects the S&P 500 to rise 16% to 4,300 by the end of 2021.
Other potential cohorts that could fuel demand for stocks due to their heightened cash balances include corporations and foreign investors, according to the note.
