- “Investment flows are an important driver of equity returns,” according to Goldman Sachs, and right now they’re signalling further upside ahead for the stock market.
- In a note published on Thursday, Goldman went under the hood of the stock market and analysed the impact fund flows, or the actual trading of securities, had on security prices.
- The firm found that fund flows can have a sizable impact on market prices if liquidity is especially low, and not so much if liquidity is high.
- Additionally, Goldman said that the the recent rise of individual investors amid the COVID-19 pandemic has been associated with declines in the stock market, not gains.
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The flow of money through different investment vehicles like stocks, bonds, and funds like exchange-traded funds is “an important driver of equity returns,” according to Goldman Sachs.
In a note published on Thursday, the firm analysed just how much or little fund flows drive returns in the stock market. And based on its analysis, it found that there’s “further upside potential” in the S&P 500 due to recent investment flows.
“We conclude that investment flows in the context of low liquidity are supportive of recent S&P 500 returns and would suggest further upside potential,” Goldman said.
The firm added that its analysis showed “that recent investment flows have been more-than-sufficient to support the recent rally in equity prices.”
Goldman said that liquidity is an important factor in determining if fund flows will have a sizable impact on stock prices.
“Flows that occur in low liquidity environments have a larger impact on asset prices than flows in high liquidity environments, which has big implications for the effect of flows during sell-offs and rebounds when market liquidity is most volatile,” Goldman said.
Goldman also noted that the recent surge in retail investor flows due to the COVID-19 pandemic hasn’t had a sizable impact on equity prices, which backs up a recent study published by Barclays.
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The firm said that “elevated individual investor activity in stocks and options have been associated with declines in SPX prices over the past 18 months that we studied.”
Goldman was not sure if either a decline in the S&P 500 attracted individual investor activity, or if individual investor activity was responsible for the decline in S&P 500 prices.
“On its surface, this runs counter to the hypothesis that individual investors are boosting stocks prices. Although it is possible that the high cash levels and the belief that the recent economic weakness is temporary has led to an unusual increase in ‘buy-the-dip’ sentiment among individual investors,” Goldman concluded.
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