As Good as it Gets: Goldman is Last Big Bank to Turn Bearish, Sees Market Dropping In Coming Months
The comments below are an edited and abridged synopsis of an article by Tyler Durden
After 12 months of optimism, JPMorgan has eased back on euphoria and joined other bearish sell-side peers at Deutsche Bank and Morgan Stanley, saying that easy equity gains for the broad market are likely behind us.
Goldman Sachs is on the bearish side, because “investors buying S&P 500 as growth peaked have typically realized negative short-term returns and weak 12-month returns, consistent with the 3% upside to our year-end target of 4300.”
Equities often struggle when economic growth slows. Goldman says that, during the last 40 years, “investors buying the S&P 500 when the ISM Manufacturing index registered above 60 – typically coinciding with peak growth – have experienced a median return of -1% during the subsequent month and a paltry +3% return during the subsequent year.”
This matters because the most recent ISM reading was 64.7, or the highest in almost 40 years, and while Goldman’s S&P 500 year-end target reflects a 4% total return from the current level, including dividends, the bank’s mid-year 2021 target remains 4100. Translation: Stocks are set to drop over the coming 2-3 months.
Goldman expects that equity prices will continue to rise as growth slows this year. Equities generally appreciate when economic growth slows as long as growth remains positive. Although US growth is peaking, the growth rate should remain strong. The global economy is still accelerating, and will not peak until 3Q 2021.
But when does the frontrunning begin, since clients will not be waiting until the last moment to dump exposure?
Some ominous stats: Goldman estimates the wealthiest households now hold $1 trillion to $1.5 trillion in unrealized equity capital gains, or 3% of total US equity market cap and +/- 30% of average monthly S&P 500 trading volume.
However, the trend of net equity selling and falling stock prices around capital gains rate changes has usually been short-lived and reversed during subsequent quarters.
Goldman expects an increase in household equity allocations, and estimates that selling of money market funds could exceed $200 billion. Some of that will represent equity demand. It also forecast net equity buying by households to total $350 billion in 2021 and be driven by the wealthiest 1%. The top 1% has bought $2 trillion of shares during the past 30 years vs. $800 billion of net selling by the bottom 99%.
Assuming Goldman is right, this is great news for the top 1%, but the wealth and income divide between the haves (the 1%) and the have nots (everyone else) is about to get even greater.