Six Reasons Why Goldman Is Suddenly Warning About A "Large Drop" In The Market
By Tyler Durden
After recent (and in some cases very dramatic) bearish conversions by the likes of JPM, BofA, Citi and UBS, the only bank that steadfastly held a bullish view on stocks during the recent market squeeze higher was Goldman Sachs.
Not any more.
On Thursday, Goldman strategist David Kostin appeared on CNBC, where he too join the bearish crowd and said that based on the threat of margin collapse (“35 out of 53 tech companies had margin declines”) and record-high stock valuations this year, it’s time to play defense in “a tough market.”
He also hinted that with 80% of fund managers underperforming their benchmark, the probability of irrational capital allocations increases, and as a result there is a “reasonably high probability” of a large drop (or “drawdown” as a sudden plunge is called in polite circles) in the S&P500 ahead of his year-end 2100 price target.
Then overnight, Kostin dedicated his entire weekly kickstart piece to just the topic of a drawdowns, saying that “Unbalanced distribution of upside/downside risks suggests “sell in May” or buy protection.” He adds that “we continue to expect S&P 500 will end 2016 at 2100, roughly 3% above the current level. However, a shift in investor perception of various risks could easily trigger a drawdown.”
Goldman’s stark and unexpected warning is driven by risks which include “elevated valuation, investor positioning, money flow trends, uncertain interest rate policy, weak economic growth, and election year politics. A 5%-10% drawdown in S&P 500 during the next few months implies an index level of 1850 to 1950 and a forward P/E of 15x-16x based on bottom-up consensus EPS.”
Of course, a 10% market drop never ends on a dime, especially in a market as illiquid as this one, and if the recent warning by JPM’s Marko Kolanovic is correct, should stocks stumble by 10% in the absence of another round of central bank intervention, we may be looking at the first official market crash in the post-cri
And just like that Goldman has joined the bearish camp.
To be sure, for Goldman faders and contrarians, this may be the most bullish catalyst yet because after the anti-Dennis Gartman ETF, doing the opposite of what Goldman recommends has historically been the most profitable trade.
Still, perhaps this time Goldman is not seeking to unload its book on muppets. Here is the full reason behind Goldman’s bearishness.
Following a tumultuous first quarter, S&P 500 has stabilized in 2Q 2016. Realized volatility averaged just 10 in April, the lowest level since May 2015. Implied volatility as measured by the VIX averaged 23 during the first two months of the year before retreating below 15 in May. Equity investors seem complacent rather than bullish about the near-term prospects for US stocks.
Looking over the horizon for the next few months, we see a variety of risks that lead us to revisit the adage and ask whether investors should “sell in May and go away” and not return until after Labor Day.
Source: Six Reasons Why Goldman Is Suddenly Warning About A "Large Drop" In The Market
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