Stocks are about to hit a ‘wall of money’ that will drive the market to record levels in July, says Goldman Sachs

• A record $7.3 trillion in money market funds could soon be reinvested elsewhere, Goldman Sachs says.

• The bank’s trading desk highlighted that high seasonalities in July prepared the market for additional gains.

• “The barrier to shorting shares at the moment is very high given future flows and random market dynamics.”

A “wall of money” is headed to the stock market this summer and will drive stocks to record levels, according to a recent note from Goldman Sachs’ trading desk.

Scott Rubner, managing director of Goldman Sachs, highlighted in the note that a record US$7.3 trillion is sitting on money market fundsand a big chunk of that is about to flow into stocks.

“My guess is that we will see large outflows from the money market,” Rubner said.

This could be especially true if the Federal Reserve begins to cut interest rateswhich is expected to take place at the September Federal Open Market Committee meeting, based on federal funds futures data.

If the Fed cuts rates, then the yield on money market funds is expected to fall from its current level of about 5%. This could be the catalyst for investors with high levels of liquidity to look for other investment alternatives.

But Rubner said he believes a flood of money will likely hit the stock market in early July, as it represents the start of the third quarter and the start of the second half of the year.

This time of year typically coincides with the purchase of shares by passive equity models.

“New quarter (Q3), new semester (2H), is when a wall of money rushes into the stock market,” Rubner wrote. “~9 bps of new $$ is put on stream every July. On $29 trillion in assets, this represents $26 billion in modeled July inflows.”

The wave of new flows that could hit the stock market in July would also align with what has become a historically bullish time of 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 alone has been highly positive for share prices.

“These statistics are astonishing for the NDX over the last 16 years. The NDX has been positive for 16 consecutive July months with an average return of 4.64%,” Rubner said of the Nasdaq 100.

It’s a similar story for the S&P 500which has been positive in July for nine consecutive years, with an average return of 3.66%.

With stocks already trading at record levels, the gains Rubner expects would take the stock market to new highs.

The story continues

“The barrier to shorting shares at the moment is very high given future flows and random market dynamics,” he said.

Read the original article at Business Insider