The Fast Money Is All-In But Goldman Says Stocks Can Go Higher

(Bloomberg) -- A growing cohort on Wall Street frets a sharp reversal could soon hit this year’s stock melt-up now that fast-money quants have ramped up their speculative bets.

But the real money has the potential to grab the baton even if these systematic players slow down.

Still-tepid inflows into mutual funds and exchange-traded funds, coupled with hordes of cash in safe assets, suggest there’s plenty of ammo to power the 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 including Alessio Rizzi and Christian Mueller-Glissmann wrote in a note Tuesday.

The bank isn’t 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 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 first time after almost two 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 the note.

At this point, the bank remains in a camp that might best be described as mildly bullish. Goldman’s David Kostin has a 2020 year-end forecast for the S&P 500 of 3,400 -- the median among Wall Street strategists tracked by Bloomberg and a level about 2.4% above where it is now.

At the same time a slew of strategists warn systematic traders are already out over their skis, less than a month into 2020. Sundial Capital Research Inc. said Tuesday that speculation in U.S. stock options just “keeps getting crazier.” That follows recent warnings from Societe Generale SA that valuations are “a big risk,” while Deutsche Bank AG said earlier this month that positioning was “very stretched.”

Still, if some of the weakest hands in the market pare their exposures, Goldman says there are others ready to pick up the slack.

“Demand for equity from funds could increase and support the equity market in 2020,” the strategists wrote.

To contact the reporters on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net;Yakob Peterseil in London at ypeterseil@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Sid Verma, Sam Potter

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