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Investors should take advantage of the recent rally in stocks and prepare for losses by buying insurance, according to Goldman Sachs.
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The bank said the narrow leadership of big tech stocks meant downside risks were high.
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These are the five reasons why Goldman Sachs says it’s time to hedge your portfolio.
Inventories have been in tatters ever since Standard & Poor’s 500 It bottomed out in mid-October, jumping more than 25%, however Goldman Sachs You believe now is the right time for investors to hedge their portfolio against future losses.
The bank recommended that investors prepare for a stock market sell-off of up to 20% within the next few months due to a possible recession.
“Some portfolio managers expect a recession to start within the next year, a view that aligns with most economic forecasters,” Goldman Sachs’ David Kosten said in June. “In that scenario… the index could drop 23% to 3,400.” “. 20 ps.
Grant Strong stock market rallyBesides a potential recession next year, Costin highlighted five reasons why investors should buy insurance for their portfolios now.
1. “Downside protection is attractively priced.”
“While investors were well hedged from March to May, investors began paying higher prices for individual stock calls in late May and index call buyers joined in starting June 2. We find these measures of buy bias to be conflicting indicators of futures market performance, and clearly show that investors have bought Bullish asymmetry in stocks and indices. With investors already in a bullish mode, it may be difficult for the market to rally further from here.”
2. A narrow market rally indicates higher downside risks.
“Historically, sharp declines in market breadth have typically been associated with significant declines in subsequent months. One of our market breadth indicators compares the distance from a 52-week high for the overall index against the average stock. Market breadth recently contracted by the most since the tech bubble on this scale.”
3. High ratings in absolute and relative terms.
The S&P 500 trades on an NTM P/E of 19x, which is the 88th percentile since 1976. Historically, when the index is trading at that level or higher, the S&P 500 has seen an average decline of 14% over the next 12 months when compared to a decline in 5% over a typical 12-month period.
4. Stock prices already look optimistic.
“Our economists expect US GDP growth to average 1.0% through the second half of 2023. However, according to a cyclical equity benchmark relative to defensive stocks, the stock market is implying a pace of economic growth of about 2%.”
5. Hiring is no longer a tailwind for stocks.
“As 2023 progressed, investors increased their exposure to their stocks. Hedge funds increased net leverage, mutual funds reduced cash balances, and foreign investors were net buyers of stocks. In the latest reading, the SI hit a 114-week high of +1.2, putting It indicates that the light situation should not be a tailwind for the stock market. There are many reasonable alternatives for stocks today, which indicates that the influx of money is unlikely to be a tailwind for stocks this year.”
Kostin’s view on sentiment and investor positioning was reinforced Wednesday by market veteran Ed Yardeni, who emphasized in a note that there could be “a lot of bulls”.
“The bullish ratio for bears compiled by Investors Intelligence jumped to 3.00 during the week of July 4, up from 2.69 in the previous week. It is the highest reading since the bull rally from March 23, 2020 through January 3, 2022,” he said. “Bullish sentiment could be a warning signal.”
Read the original article at Business interested