Goldman Sachs capital flow experts predict the trend for the remaining three months of this year: bearish at the end of the quarter, falling before the election, and rising before the end of the year

With only 71 trading days left in 2024, after the turmoil experienced in September, how will the US stock market fluctuate again? Scott Rubner, a fund flow expert at Goldman Sachs who accurately predicted the stock market pullback in late summer, has divided the remaining three months of this year into three trading periods: end of the quarter, pre-election, and year-end.

Short-term

In a report on Friday, September 20th, Rubner, Managing Director of the Global Markets Division at Goldman Sachs, mentioned that his short-term trading view is bearish.

There are 7 trading days left until the end of the third quarter in September. The report states that it should be noted that the short-term technical outlook is unfavorable before the end of the quarter.

The market reaction after the Fed meeting on Wednesday seemed to be delayed by a day, with a significant rebound in the US stock market on Thursday. This Triple Witching Day on Friday, a total of $4.5 trillion worth of US stock options will expire, marking the largest scale options expiration in September on record and the fourth largest in history, only behind June of this year, December of last year, and March of this year. The expiration of these options releases Gamma, allowing the market to move freely in any direction after the options expire on Friday.

Major US stock indexes fell back during Friday's intraday trading after a significant rebound on Thursday.

Rubner stated that given the large batch of derivatives expiring on Friday, the stock market's rise on Thursday felt more like a technical and temporary rebound. Tactically, he is bearish on the end of this quarter, especially considering that Thursday's rebound was mechanical, involving rebalancing and options impact.

In addition, Goldman Sachs' US TMT Spec sales team pointed out that on Thursday they answered many "chase or not chase" type questions, as the speed of the US stock market rebound on Thursday seemed to catch many off guard, leading many to take a more conservative stance before the US election.

Medium-term

Rubner believes that in the medium term, the market will be volatile, stock prices will decline, volatility will rise, and investment institutions, funds, and asset management companies will be forced to hedge.

There are 32 trading days left until the US election on November 5th, and 35 trading days until the next Federal Open Market Committee (FOMC) meeting on November 7th. Rubner is cautious about the risks before the election, considering the reset of implied volatility, he believes investors will reduce 1 delta and increase directional hedges.

Long-term

Looking ahead, Rubner's trading view is that by the end of this year, there will be a melt-up in the US stock market.

After the US election, there are still 39 trading days left until the end of 2024. According to Rubner, the decline in the US stock market may end by November. His goal is for the S&P 500 to reach 6000 by the end of the year, being driven by the fear of missing out (FOMO).

Rubner predicts that investors will chase risks in November and December, reallocating their portfolios from cash to stocks. The market will trade in 2025 like a pile of RINO (nominal recession) portfolios The breadth of the market will increase, with previously unpopular themes such as inflation, value stocks, energy stocks, and emerging markets outperforming the broader market.

In terms of buybacks, Rubner mentioned that according to Goldman Sachs, the quiet period for stock buybacks by listed companies will end on October 25th, with 55% of companies currently in this quiet period and unable to repurchase shares. Since the beginning of the year, the total authorization for share buybacks by companies has reached $911 billion, the second-highest on record, only behind the $926 billion in the same period in 2022. Listed companies have been the largest buyers in the U.S. stock market this year, and Goldman Sachs expects a 35% decrease in buyback demand during the quiet period. November and December at the end of the year are the two months with the highest proportion of buybacks in the year.

Regarding pension funds, Rubner mentioned the end-of-quarter rebalancing of pension funds in September, stating that the Milliman 100 Pension Fund Index shows a funding ratio of 103% for pension funds. Goldman Sachs has observed pension funds shifting towards investment-grade credit bonds, reducing equity risk, and using immunization strategies to reduce liability risk. With ample funds, pension funds have been reducing equity risk ahead of the U.S. election.

In terms of mutual funds, Rubner noted the adjustment of the total $1.1 trillion mutual fund size at the end of the quarter, with September being relatively small in terms of fund size at the end of the fiscal year. Goldman Sachs research on 554 large mutual funds with a total of $3.7 trillion in stock assets found that October is the last month of the fiscal year for most mutual funds this fiscal year, with October accounting for nearly 24% of total actively managed assets, followed by December at around 20%.

In a previous report, Rubner mentioned that October, being the end of the fiscal year, may have a negative impact on the price trends of popular mutual funds, as poorly performing funds since the beginning of the year may be sold off due to tax losses, while well-performing funds may reduce holdings or take profit.

Regarding trading during the U.S. election period, Rubner pointed out that since 1900, the average return of the S&P 500 Index in November and December each year is 2.9%, while in election years since 1900, the average return of the index in November and December is 3.4%. In other words, regardless of the outcome of the U.S. election in November, the average returns of the S&P 500 in November and December are usually higher than the average level