A good chunk of that fresh "stimmy" money about to be funneled into American households via the $1.9 trillion COVID-19 relief bill may find its way into the stock market, pontificates Goldman Sachs.
"We expect households will be the largest source of equity demand this year," says Goldman's chief U.S. equity strategist David Kostin. "We raise our household net equity demand forecast to $350 billion from $100 billion, which reflects faster economic growth and higher interest rates than we had assumed previously, additional stimulus payments to individuals, and increased retail activity in early 2021."
Goldman's latest research shows net U.S. equity demand among households reached $307 billion in the first nine months of 2020.
Corporations are expected to be the second largest source of U.S. equity demand this year at $300 billion.
At first blush, Goldman's increased equity demand forecast seems counterintuitive even when considering some households will be armed with new stimulus checks.
The march higher in the 10-year yield to near 1.6% over the past month — fueled by rising inflation concerns — has pressured markets and formerly hot momentum stocks. In the last month alone, the Nasdaq Composite and S&P 500 are down 7% and 3%, respectively. The Dow Jones Industrial Average is down slightly.
Equity fund flows
Despite the yawning bearish sentiment in markets of late, that surprisingly hasn't stopped inflows into mutual funds and ETFs (hence, in part fueling Goldman's optimism on household equity demand).
Equity mutual fund and ETF inflows have totaled $163 billion since the start of February, according to Goldman's research. That marks the largest five-week inflow on record in absolute dollar terms, and the third largest in a decade relative to assets. In contrast, Goldman notes weekly flows into bond funds averaged about $10 billion in February, down 50% from January.
Kostin reasons that history is on the side of suggesting household demand to get involved in the market will continue this year, in spite of the climb in rates.
"During the past 10 years, the most favorable backdrop for equity fund inflows has been when both real rates and breakeven inflation were rising. This is intuitive given that the dynamic typically occurs when growth expectations are improving. However, equity funds usually experienced inflows when real rates rose and breakeven inflation fell. In short, equity fund flows have been more clearly delineated by the trajectory of real yields than by inflation during the past decade," Kostin says.
Others on the Street are staying on board with the optimism on the markets as the rate rise rattles some.
The S&P 500 has posted an average price return of 14.2% during periods of rising interest rates compared to a mere 6.4% average gain in periods of falling rates, BMO Capital Markets chief markets strategist Brian Belski's research dating back to 1990 shows. In seven interest rate cycles Belski identified since 1990 in which yields rose for "prolonged" periods, the S&P 500 has had an average annualized price gain of about 15.1%.
"The economy is recovering because earnings are going up, the fundamentals are improving so of course, interest rates are going to go up," Belski said on Yahoo Finance Live.
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