A record $7.3 trillion in money market funds could soon be reinvested elsewhere, Goldman Sachs says.
The bank’s trading desk highlighted that bullish seasonals in July set the market up for further gains.
“The bar for being short equities right now is very high given these upcoming flow and random market dynamics.”
A “wall of money” is headed for the stock market this summer and will drive equities to record highs, according to a recent note from Goldman Sachs’ trading desk.
Scott Rubner, a managing director at Goldman Sachs, highlighted in the note that a record $7.3 trillion is sitting in money market funds, and a large chunk of that is poised to flow into stocks.
“My hunch is that we will see some big money market outflows,” Rubner said.
That could be especially true if the Federal Reserve starts to cut interest rates, which is expected to happen at the September Federal Open Market Committee meeting based on fed fund futures data.
If the Fed cuts rates, then the cash yield on money market funds should drop from its current level of about 5%. That could be the catalyst for investors with high levels of cash to seek other investment alternatives.
But Rubner said he thought a flood of cash was likely to hit the stock market at the start of July, as it represents the start of the third quarter and the start of the second half of the year.
That time of the year typically coincides with passive equity models buying stocks.
“New quarter (Q3), new half year (2H), this is when a wall of money comes into the equity market quickly,” Rubner wrote. “~9 bps of new $$ gets put to work every July. On $29 trillion in assets, that is $26B in modeled July inflows.”
The rush of new inflows that could hit the stock market in July would also align with what has become a historically bullish time of the year.
Rubner highlighted that the first 15 days of July have been the best two-week trading period of the year since 1928. The best trading days of the year occur in the first week of July, and the month of July on its own has been highly positive for stock prices.
“These stats are staggering for the NDX over the past 16 years. NDX has been positive for 16 straight July’s with an average return of 4.64%,” Rubner said of the Nasdaq 100.
It’s a similar story for the S&P 500, which has been positive in July for nine straight years, with an average return of 3.66%.
With stocks already trading at records, the gains Rubner expects would send the stock market to fresh highs.
“The bar for being short equities right now is very high given these upcoming flow and random market dynamics,” he said.
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