Institutional and individual investors fled stocks in the fourth quarter of 2018 so quickly that equity allocation by mutual funds, pension funds, U.S. households, and foreign investors reached its lowest share since June of 2016, according to Goldman Sachs Global Investment Research.
In a note to clients, Goldman analysts led by Arjun Menon said that equity allocations fell to 41% of total assets, as of Jan. 4, higher than the average rate since 1990, but down from the 45% equity allocation seen at the end of September, allocation levels rarely seen outside of the run-ups to the 2000 and 2008 stock market crashes.
Nearly all of the outflows from equities found their way to cash, with money-market funds seeing $165 billion in inflows in the 60 days leading up to Jan. 4, according to Menon, who sees higher cash levels as wise. “We recommend mixed-asset portfolio managers stay invested in equities, increase their cash allocations and reduce allocations to bonds,” Menon wrote.
“The reduced valuation of the stock market selloff following the year-end selloff suggests positive returns to U.S. equities in 2019,” he continued. “Our baseline forecast is that the U.S. economic expansion continues and that 6% earnings-per-share growth, combined with a multiple re-rating to 16 times earnings, will lift the S&P 500 Index
to 3,000 by year-end.”
That said, Goldman analysts advise that investors maintain higher cash levels. At 13% of assets, overall cash allocation among institutional and individual investors remains at historically low levels: cash levels have been lower just 6% of the time since 1990. “Uncertain Fed policy, ongoing trade tensions, and liquidity concerns pose risks to our 2019 baseline forecast,” Menon wrote. “With 3 month U.S. T-bills
at 2.4%, and [low levels of volatility], cash represents a competitive asset.”
Carlos Dominguez, chief investment officer at Element Pointe Advisors, agrees with Goldman that a U.S. recession is unlikely in the near term, and that absent any serious policy mistakes, that means stock valuations have room to run this year.
“We took risk off in December, just because volatility was at a level we weren’t comfortable with, but as that died down we moved to being slightly overweight equities,” he said. “We think the S&P 500 can reach 2800 this year,” if the Federal Reserve can avoid hiking rates too aggressively, and if the U.S. and China can come to some lasting truce over trade.
“Recessions are inevitable,” he said. “But good policy can buy us more time, just as bad policy can pull it forward.”