US stocks experienced the "worst October in five years". Goldman Sachs: The market is pessimistic, providing entry opportunities!

Multiple long positions have retreated significantly, and the "fear index" VIX on Wall Street has remained above 20 for two consecutive weeks. The US stock market is facing its worst October performance in five years, while the continued volatility in the US bond market is causing more concern among investors.

A survey of professional investors shows that active fund managers have reduced their stock exposure to the lowest level in over a year, while hedge funds have increased their short positions for the 11th consecutive week.

At the same time, the market is becoming increasingly pessimistic about the prospects for US economic growth. However, Goldman Sachs believes that if this situation continues, it may provide investors with entry opportunities.

US stocks suffer the "worst October in five years"

Last week, the S&P 500 index closed at 4,117.37 points on Friday, down 10% from its peak at the end of July 2023. Since October, the S&P 500 index has fallen more than 1% five times.

The forecast price volatility index of the Nasdaq 100 index has hovered at its highest level since March last year. Even though tech stocks got some breathing space on Friday due to strong performances from Amazon and Intel, the Nasdaq still recorded its worst two-week decline of the year and may see the largest monthly decline in October since 2018.

According to the latest survey by the National Association of Active Investment Managers, fund managers' positions have fallen to the level of October 2022. In addition, according to Barclays Bank's analysis of CFTC data, the stock positions of most investor categories are below their long-term average levels, with hedge funds and mutual funds being the worst affected. Almost all long positions are retreating and strengthening their defensive stance over the past year.

On the other hand, professional speculators' short positions have been increasing for nearly three months, which is the "longest growth record" referred to by Goldman Sachs' bulk brokerage division.

In addition, the "fear index" VIX on Wall Street has remained above 20 for the second consecutive week, after previously staying below this level for over 100 days. The volatility in the bond market is causing more concern among investors. On Wednesday and Thursday, US bonds experienced fluctuations of more than 10 basis points, putting more pressure on companies that failed to meet performance expectations.Miller Tabak & Co's Chief Market Strategist, Matt Maley, said:

With yields much higher than six months ago, the stock market must fall to valuation levels that are more in line with historical norms...

The most important issue is that there has been a significant divergence between the bond market and the stock market.

Now, the biggest question is whether this wave of withdrawals is a precursor to a rebound or the beginning of a long and painful period. This is the most concerning issue as we enter November.

Doug Ramsey, Chief Investment Officer at Leuthold Group, said:

"What is concerning is that the current market decline has not brought about much improvement in investor sentiment."

Goldman Sachs: Market is pessimistic, providing entry opportunities!

Last year, the "great reversal" in the U.S. stock market was closely related to changes in institutional and retail investor positions. Overall, as investors reduced their long positions, the stock market began to rise, and when buying increased, the stock market began to decline.

Barclays strategists believe that the reduction in stock positions, positive technical signals, and seasonal factors are increasing the possibility of a year-end rebound. Earlier this month, Bank of America and Deutsche Bank made similar statements.

Goldman Sachs' strategy team, led by David Kostin, believes that the market is becoming increasingly pessimistic about the prospects for U.S. economic growth. However, if this situation continues, it may provide an entry opportunity for investors:

"Although we expect to continue to face some challenges, including discount rates and balance sheet issues, if the outlook for economic growth is further downgraded, we will see it as an opportunity to buy stocks."

This view emerged after the 10-year U.S. Treasury yield rose above 5% for the first time since 2007 on October 23. The Federal Reserve has been maintaining relatively high interest rates to curb inflation.

Meanwhile, RBC strategist Lori Calvasina stated on the same day that it is unlikely for the broader market to stabilize before the surge in yields ends. It is worth mentioning that Kostin also warned earlier this month that higher interest rates could impact the profits of U.S. companies, and strategists from Morgan Stanley and JPMorgan also warned that profit prospects seem to be deteriorating.

Peter van Dooijeweert, Head of Defense and Tactical Alpha at Man Group, said:

"Higher long-term rates and recent signs of inflation suggest that the bond market will not stabilize anytime soon...

As rates rise, equity weakness associated with rising rates may persist, especially if corporate performance is poor."

Kostin predicts that the S&P 500 index will reach 4,500 points by the end of the year, slightly higher than the average target of 4,370 points tracked by Bloomberg.

On Friday, the S&P 500 index closed at 4,117.37 points, down 10% from its peak reached at the end of July 2023. It is worth noting that a few days before the S&P 500 index reached its peak, Kostin stated that the index's high valuation was reasonable and could further rise by the end of the year.