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Exhibit 55: US Equity Fund Flows and Change in
10-Year Treasury Yield
Bond returns can influence flows into equity funds.
Percentage Points, YoY % of Assets, 3-Month Moving Average
Change in 10-Year Yield 8
eo--- Equity Minus Bond Flows (Right)
5
1984 1989 1994 1999 2004 2009 2014
Data through December 31, 2016.
Source: Investment Strategy Group, Bloomberg, ICI.
Exhibit 56: The AAIl Bullish Investor Sentiment
Lack of investor euphoria is a contrarian positive for stocks.
% Bullish, 52-Week Average
60
55
20
1988 1993 1998 2003 2008 2013
Data through December 31, 2016.
Source: Investment Strategy Group, Bloomberg, American Association of Individual Investors.
Exhibit 57: Non-Dealer US Equity Index Futures
Positioning
There is scope for increased US equity positions.
$bn
140
120 +
100 -
80 4
60 +
40
20
o +4
-20
-40 4
-60
-80
2011 2012 2013 2014 2015 2016
Data through December 31, 2016.
Source: Investment Strategy Group, CFTC, Goldman Sachs Securities Division Equity
Strats Group.
incipient uptick in bond outflows seen in late 2016
may persist, especially with “risk-free” Treasuries
delivering a notable loss in the fourth quarter.
Today’s visible lack of market euphoria
represents another potential positive for stocks.
Exhibit 56 shows the proportion of investors
classifying themselves as “bullish” near its lowest
level in decades. Meanwhile, non-dealer positions
in US index futures stand well below the levels
seen in 2013-14, providing scope for upside (see
Exhibit 57). If bull markets “die on euphoria” as
Sir John Templeton observed, then these measures
argue we have not yet reached the apex.
A rare technical analysis signal corroborates
that view. As shown in Exhibit 58, the Coppock
curve—an intermediate-length momentum signal—
has generated only 17 buy signals over the past 71
years, but collectively they have provided attractive
low-risk entry points for long-term investors. If
we took the median path of S&P 500 prices after
past signals, it would imply the market gains 9%
this year with 88% odds of a positive outcome. Of
particular note, Coppock buy signals on the NYSE,
Russell 2000 and FTSE All-World Index were also
triggered in November, even before the post-election
rally. For all the reasons discussed above, we accord
a 25% probability to our good-case scenario of the
S&P 500 reaching 2,450 by year-end.
Of course, we are equally aware of the myriad
downside risks investors face, including growing
unease about a disorderly backup in bond yields.
But here, our work suggests that rates have scope
to increase further before becoming a headwind for
stocks, even if adjusted for today’s lower long-run
equilibrium nominal rate (see Exhibit 59}. Keep
in mind that 88% of S&P 500 debt has a fixed
interest rate and only about 10% matures each
year. The impact of higher rates will be spread over
many years as a consequence.
54 | Goldman Sachs | JANUARY 2017
HOUSE_OVERSIGHT_014587