Goldman Sachs has observed a significant rise in a basket of heavily shorted stocks, which increased by over 11% in the past five trading days. The trading department anticipates that this trend will persist until the inauguration of the new U.S. president in January. They suggest that stocks with high short interest, high-floating rate bonds, and low momentum stocks may face increased repricing risks as the year comes to a close.
Analyses of Republican presidential victories in 2000, 2004, and 2016 reveal that stocks previously experiencing losses and those with high Beta values tend to increase in value post-election. Large-cap stocks often underperform compared to small-cap stocks, and momentum strategies can falter while value and yield outperform growth.
Goldman advises holding on to heavily shorted stocks until the end of January, based on historical data showing low-quality stocks perform best in January, June, and November. Since July, short interest has been rising, suggesting potential for short covering before year-end.
High-floating rate bonds have broken a downtrend against the S&P 500 index, while cyclicals paired with defensives have shown the best performance since 2020. Momentum is currently entering its weakest phase in over two decades, spanning November through January.
Goldman expects rotational pressures to remain a key market feature post-election, as investors pivot towards small caps and cyclical or inflation themes. Following interest rate cuts by central banks and volatile bond yields, investor fatigue is evident.
Goldman strategists remain pro-risk, favoring U.S. equities and high-yield bonds while reducing European exposures. They recommend hedging strategies as bond sell-offs could pressure equities.
