(Bloomberg) -- Positioning and macro factors shift the market skew to positive, but investors should still focus on buying high-quality assets, according to Tony Pasquariello, global head of hedge funds coverage at Goldman Sachs Group Inc.
The S&P 500 Index is riding a seven-session winning streak as data show that the US economy is holding up, earnings growth is broadening beyond the technology giants that dominate the market, and the Federal Reserve has ammunition to start cutting interest rates as soon as in September. Fund positioning is also favorable for US stocks.
“The speculative community has cleaned up a decent amount of length since the July highs,” Pasquariello wrote in note to clients Friday, referring to Goldman’s prime brokerage data that tracks hedge funds’ positioning and the latest update from the Commodity Futures Trading Commission.
This comes after last week’s volatility explosion, when so-called systematic funds cut their equities allocation from extremely elevated levels as the market sold off and the Cboe Volatility Index briefly soared to levels not seen since the pandemic hit. Those quant investors are now expected to buy stocks no matter which direction the market goes in the next few weeks.
“In addition, households — and, in turn, long-only managers — didn’t lose their nerve in the recent volatility,” Pasquariello wrote.
Corporate America also emerged as big dip-buyers following the chaos, with Goldman’s unit that executes share buybacks for clients seeing record orders last week. It’s running about $5 billion a day, Pasquariello noted.
And the macro economic environment is supporting stocks as well, with retail sales beating estimates, jobless claims hitting the lowest since early July and inflation numbers coming in line with expectations.
“While the setup is riskier today than it was earlier in the year, I don’t believe the bottom is falling out of US consumption,” Pasquariello wrote.
The biggest risks he sees right now? Increased volatility amid August’s low liquidity, and uncertainty around the US presidential election.
“The trading environment will remain choppy, so I’d sit tight with a portfolio that’s reduced to the highest quality assets,” he wrote.
©2024 Bloomberg L.P.
