“Since the start of November, US equity mutual funds and ETFs have witnessed $52 billion of inflows, the largest inflows relative to assets during any five-week period since March 2017,” Goldman’s Arjun Menon and David Kostin wrote, in a note dated earlier this week.
The debate over whether equity sentiment and positioning has reached extremes sometimes amounts to people talking past each other. That’s due to differences in the construction of sentiment indicators, the inherently imprecise nature of measures which attempt to capture human emotions, and, more colloquially, the impossibility of determining when a mania-prone asset changing hands among greedy people has “peaked.”
And yet, talk of extremes in sentiment, “melt-ups,” “overshoots,” and “froth” is getting louder, with many analysts drawing parallels to the post-tax cut euphoria in early 2018.
Read more:
JPMorgan On 2018 Melt-Up Parallel – ‘Any Near-Term Equity Correction Is Buying Opportunity’
Although Goldman is comfortable with their upbeat medium- to longer-term forecasts, the bank notes that “from a tactical perspective,” equity positioning is two standard deviations above average.
The bank’s sentiment index, which combines six weekly and three monthly measures of equity positioning across retail, institutional, and foreign investors, is now in the 98th%ile since 2009.
Inflows into stocks are a big part of that ostensible sentiment overshoot. As noted here at the outset, US equity funds have enjoyed mammoth inflows since the start of November (figure below).
But it’s not just a flows story. “Hedge fund net leverage has continued to climb and is just shy of the highest level on record,” Goldman went on to say, adding that “a further decline in US equity mutual fund cash positions to a 40-year low (just 1.7% of assets) and a jump in CFTC net futures length have also contributed to the recent rise in our Sentiment Indicator.”
As far as equity allocations go, the bank says that in total, allocations to stocks are in the 97th%ile going back three decades.
Stocks account for nearly half of total assets among households, pension funds, foreign investors, and mutual funds. Between them, those four investor cohorts own 90% of the corporate equity market.
The bottom line, for Goldman anyway, is that “in the near-term, the risk of a modest equity market pullback has risen because the worsening virus situation in the US could spur a positioning unwind.”
As noted on innumerable occasions of late, Goldman’s forecasts for US and global growth are generally upbeat, as are the bank’s projections for US corporate profits in 2021.
So, again, the “tactical” correction warning is just that — “tactical.”
“Our baseline assumptions that a vaccine will be widely distributed by mid-2021 and that the US economy will experience a ‘V’-shaped recovery are the key drivers of our S&P 500 2021 year-end forecast of 4300 (+16%),” Menon and Kostin wrote. “Stretched positioning has typically represented a downside risk only to near-term forward returns.”
Read more:
Goldman Sees Big Disconnect In Market Pricing For Dividends
50% Of Population In Major Developed Markets Will Be Vaccinated By May
I am going with Ray Dalio’s view, which is that relative to bonds, equities are “cheap”. He referenced that with interest rates where they are, bonds are trading at 75 times earnings and “there’s no good reason that stocks couldn’t trade at 50x earnings”.
😂😂
That’s the narrative that is carrying us higher.
I find it hard to buy into because … would you buy a small business, say an ice cream shop, at 50 times earning? There once was a time when investors thought about such parallels. Not anymore.
So I learned to focus on flows pretty much exclusively.
In that regard, I’m wondering if a Biden administration will resurrect the push to make buy-backs less attractive. I haven’t seen even one talking head countenance that possibility. It’s not far-fetched – there were quite a few Republicans in DC in favor of doing something as well. It could be bi-partisan!
But, that’s an issue for next year.
Having owned an active business (a rental property) and passive investments (us equities), I would definitely demand a much higher return for an active business for many reasons- not just because it is a lot of work/worry to own an active business but because you can’t buy in/sell out at the flick of a keystroke.
The USA, if we do a good job navigating the domestic and global economies, can solidify its “investor” status.