While the stock market showed some minor signs of stabilization near the end of this week, Goldman Sachs said investors should prepare for the sell-off to get worse before it gets better. Despite the sharp declines that sent the S & P 500 into a bear market at the fastest pace ever, investors' equity allocation is still above the previous market bottoms in 2001 and 2008, according Goldman. In other words, until more investors sell, this market has not likely reached levels that have marked a capitulation and turning point in the past. "A further decline in investor equity positioning, in concert with thin liquidity and a reduction in corporate buybacks, should cause the S & P 500 to fall to our estimated trough of 2000," Arjun Menon, U.S. portfolio strategist at Goldman, said in a note. The 2,000 target for the bottom represents a 16% drop for the S & P 500 from Thursday's close of 2,409. The equity benchmark tumbled another 18% in March alone, now sitting nearly 30% from its record high reached last month. Stocks attempted to rebound for a second day on Friday. The Dow Jones Industrial Average jumped 400 points at one point after the Federal Reserve took further action to include municipal bonds in its asset purchases. Still, the market remained highly volatile, fluctuating between losses and gains and was last lower. Goldman estimated that investors are still holding about 37% of stocks in their portfolios, compared to 35% during 2001's market bottom and just 28% during the 2008 trough. Meanwhile, cash allocations are still relatively low (35th percentile) compared to history, the bank said. "We expect that the rotation away from equities will persist in the near-term," Menon said. "Uncertainty around the global spread and economic impact of COVID-19 remains high, volatility is at extreme levels across asset classes, and liquidity is thin. In this environment, investors are likely to continue cutting portfolio risk." The coronavirus death toll continued to rise with the global number surging above 10,000 on Friday, according to data from Johns Hopkins University. Meanwhile, California on Thursday issued a statewide order for all residents to "stay at home" amid a coronavirus outbreak. This week, Wall Street's fear gauge, the Cboe Volatility Index, surged to a record high of 82.69, surpassing the peak level of 80.74 during the financial crisis more than a decade ago. Analysts said the heightened volatility showed the uncertainty around the length of the outbreak and its economic impact. Still, Goldman encouraged long-term investors to stay the course as growth will eventually rebound after the outbreak is contained. "We recommend investors with longer-term investment horizons remain invested in equities," Menon said. "By year-end, economic and earnings growth should be accelerating, the fed funds rate will remain at the zero lower bound, and the impact of any fiscal stimulus will be flowing through to consumers. In this scenario, equities will appear attractive relative to bonds and cash."
