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Investing.com – Investment bank advises investors to take advantage of the recent stock rally and brace for losses by making sure writes Business Insider.
With just one group of stocks dominating the market—the largest-cap tech companies—there is an increased downside risk looming over the market. The potential decline could be as much as 20% over the next few months. Many portfolio managers predict the start of a recession within the next year, and this opinion is consistent with most economic forecasts.
Goldman Sachs named 5 reasons to hedge a portfolio.
1. Loss protection at an affordable price
In the first quarter, from March to May, investors had good insurance when the market was in a rally, but now they have to pay higher prices for individual shares. Since some traders have taken bullish positions, it may be harder for the market to break higher and further.
2. Limited Rally Means Higher Downside Risk
The narrowness of the rally has historically driven the subsequent strong decline. And recently, market breadth, that is, the total number of shares traded, has narrowed the most since the tech bubble.
3. Estimates are overstated in absolute and relative terms
trades at a P/E multiple of 19x, representing the 88th percentile since 1976. Historically, when the index traded at or above this level, the S&P 500 experienced an average 14% drop over the next 12 months, compared to a 5% drop over a typical 12-month period.
4. Optimistic forecast
Despite economists’ forecast of average US GDP growth of 1.0% in the second half of 2023, the rise in cyclical stocks compared to defensive stocks suggests much more optimism – a rise of about 2%.
5. Positioning will no longer help stocks.
Since the beginning of the year, investments in the stock market have only increased, hedge funds have increased their net leverage, mutual insurance funds have reduced cash balances, and foreign investors have become net buyers of shares. It is assumed that light positioning will no longer help the stock market, as there are many reasonable alternatives to stocks today. Too optimistic bullish sentiment can be a wake-up call.
— Materials from Business Insider were used in the preparation
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2023-07-06 15:43:00
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