The benchmark S&P 500 has rallied 14% since bottoming on Mar. 23 as investors have looked ahead to a COVID-19 vaccine and a normalization of the U.S. economy.
“Stretched positioning typically represents a headwind to short-term equity market returns when economic growth is stable or decelerating,” wrote a Goldman Sachs research team led by Arjun Menon, vice president of U.S. equity strategy. “The recent surge in COVID-19 hospitalizations and weaker-than-expected economic data therefore increase the risk of modest positioning-driven pullback in the next month.”
The firm’s Sentiment Indicator found positioning in the stock market, boosted by $52 billion of investor capital flowing into mutual funds and exchange-traded funds, was two standard deviations above average and in the 98th percentile of readings since 2009.
A resurgence of the virus has resulted in a slowdown in the economy with a record 101,487 patients hospitalized Sunday due to COVID-19. The resurgence of the virus has caused some states, like California, to reintroduce lockdowns to help slow the spread. Others, including Illinois, have rolled back their reopening measures with New York warning indoor dining may be reversed in the coming days.
The recently imposed restrictions will likely further weigh on an economy that has for six consecutive months experienced a drop in the number of new jobs. The latest readings on consumer sentiment and retail sales also suggested the economy is slowing from the record 33.1% growth experienced in the second quarter of this year.
Investors, however, have managed to look past what appears to be a near-term soft patch, instead looking ahead to a vaccine helping bring the economy back to normal.
The U.S. Food and Drug Administration on Thursday will consider the Pfizer/BioNTech COVID-19 vaccine for emergency use authorization and a week later evaluate Moderna’s.
The vaccines, if approved, will start being distributed within days, which is at least partially responsible for the investor exuberance in the stock market.
The American Association of Individual Investors Sentiment Survey released on Dec. 3 found 65% of all respondents were bullish on the stock market compared with 17% who were bearish.
“Animal spirits are indeed running high and sentiment indicators are simply off the charts,” wrote David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research. “If you’re into groupthink, this market is for you.”