Goldman Sachs sounded the alarm bell on Monday as Dow Jones futures point to a weak stock market open. The Wall Street giant is unloading stocks at the fastest pace in five years, and advising investors to do the same.
According to Goldman analysts, the stock market is priced to perfection. In a note to investors, the bank pointed to four factors that could trigger a selloff.
- Poor global manufacturing data.
- The slew of poor corporate earnings reports coming this quarter.
- Traders too optimistic about Federal Reserve easing.
- The flow of capital to “haven” assets like bonds.
Dow futures slump on Monday
Dow Jones Industrial Average futures slipped lower in early trading Monday. As of 7.27 am EST, the flagship index looks set to open in the red, down 56 points (0.21 percent) to trade at 26,829.
S&P 500 futures look equally gloomy, down 5 points (0.18 percent) while Nasdaq Composite futures point to a 29 point drop (0.38 percent).
Goldman Sachs warns of Dow Jones pullback
Goldman slashed its equities recommendation to underweight, predicting a retracement from the Dow and S&P 500’s recent all-time highs.
It comes after strong economic data on Friday dashed hopes of a Federal Reserve rate cut in July. Non-farm payroll data came in much higher than expected, making it harder for the Fed to justify further monetary easing.
“The bounce back in the June jobs number may splash cold water on the notion of an imminent Fed rate cut” - Tony Bedikian, Citizen’s Bank.
Donald Trump also weighed in with more criticism of the Federal Reserve. He claimed the Dow would take off like a “rocket ship” if the Fed cut rates. The stock market will likely readjust this week as traders price in a lower probability of monetary easing in July.
Traders flock to haven assets
Goldman Sachs isn’t the only institution cutting its position in global equities. As CCN reported, $220 billion wealth management firm Pictet reduced its exposure to stocks in June. As a hedge against looming uncertainty, the company now holds an outsized position in cash.
A recent Bank of America Merrill Lynch survey also revealed that fund managers were unwinding stocks at a record pace. Meanwhile, haven assets like gold, bonds, and bitcoin have recorded huge inflows.
David Roche of Independent Strategy sees gold hitting $2,000 by the end of the year as haven demand ramps up.
“I think the trade conflict with the United States is a much far, wider-reaching, global conflict, which will undermine growth expectations in equity markets.”
As for Goldman Sachs, their strategists are looking for value in Japanese and European stocks. While they admit these assets are vulnerable to global pressures, they should hold up better than US equities.