A record $7.3 trillion currently held in money market funds may soon be redirected into the stock market, setting the stage for substantial gains in July, according to Goldman Sachs. The bank’s trading desk has highlighted a convergence of bullish seasonal factors that could drive equities to new heights.
Scott Rubner, a managing director at Goldman Sachs, emphasized the unprecedented amount of money sitting in money market funds and the potential for significant inflows into stocks. “My hunch is that we will see some big money market outflows,” Rubner noted.
Federal Reserve’s Role in Market Dynamics
This anticipated shift could be accelerated if the Federal Reserve moves to cut interest rates, a possibility that is gaining traction with market participants. According to fed fund futures data, a rate cut could be on the table at the Federal Open Market Committee meeting in September. Should this occur, the yield on money market funds, currently around 5%, would likely decrease, prompting investors to seek higher returns in the stock market.
Rubner suggests that the substantial inflows could start as early as July, coinciding with the beginning of the third quarter and the second half of the fiscal year. Historically, this period is marked by passive equity models purchasing stocks, leading to increased market activity.
Historical Performance and Seasonal Trends
Rubner pointed out that early July has consistently been a strong period for equities. “New quarter (Q3), new half year (2H), this is when a wall of money comes into the equity market quickly,” he wrote. Based on his analysis, approximately 9 basis points of new investment flows into the market each July. With $29 trillion in assets, this translates to about $26 billion in modeled July inflows.
The historical performance of the stock market during this period supports Rubner’s optimism. The first 15 days of July have been the most favorable two-week trading period of the year since 1928. Specifically, the Nasdaq 100 (NDX) has recorded gains for 16 consecutive Julys, averaging a 4.64% return. Similarly, the S&P 500 has posted positive returns for nine straight Julys, with an average gain of 3.66%.
Implications for Investors
As stocks continue to trade at or near record highs, the expected inflows could push the market to new levels. “The bar for being short equities right now is very high given these upcoming flow and random market dynamics,” Rubner concluded. This sentiment suggests a challenging environment for bearish investors in the face of potential bullish momentum.
Key Takeaways
- Record Money Market Funds: A significant portion of the $7.3 trillion in money market funds may flow into the stock market soon.
- Federal Reserve Impact: Potential interest rate cuts by the Fed could drive investors to seek higher returns in equities.
- July Inflows: Historically, July is a strong month for stock market gains, with substantial inflows expected.
- Market Performance: The Nasdaq 100 and S&P 500 have shown consistent positive returns in July over the past several years.
- Investment Strategy: Given the anticipated inflows and historical trends, the market presents a challenging environment for short positions.
Conclusion
Goldman Sachs’ analysis highlights the potential for significant market gains driven by a massive inflow of capital from money market funds. With the Federal Reserve’s potential rate cuts acting as a catalyst and the historical performance of the stock market in July, investors may see a favorable environment for equities in the coming months. As a result, positioning for bullish trends could be a strategic move for market participants.
