With the S & P 500 scoring its best three-day rally since 1933 last week, investors wondered if the massive bounce was a sign of the worst for the market is behind us. Goldman Sachs said not yet. The S & P 500 jumped 17.6% from Tuesday through Thursday in anticipation of the historic $2 trillion coronavirus relief bill, trimming its 2020 loss to 21.3%. However, Goldman warned that sharp bounces like last week's are common during bear markets, and stocks won't hit their trough until three things materialize. "Bear markets are often punctuated by sharp bounces before resuming their downward trajectory," David Kostin, Goldman's chief U.S. equity strategist, said in a note on Sunday. "A three-part checklist for a sustained rally: (1)Slowing viral spread; (2) Evidence that fiscal and monetary policy stimulus is working; and (3) A bottoming in investor positioning and flows." Kostin predicted the S & P 500 could find its bottom at 2,000 mid-year, a further 21% drop from Friday's close of 2,541. He pointed out that during the financial crisis, the S & P 500 experienced six bounces of 9% or more between September and December 2008, with some rallies as large as 19%. However, the actual market bottom did not occur until March 2009, Kostin said. The U.S. has officially become the country with the most coronavirus cases in the world, with at least 125,000 confirmed cases of infection, according to data from Johns Hopkins University. President Donald Trump signed a $2 trillion relief bill on Friday, which includes one-time payments to individuals. Meanwhile, the Federal Reserve has unloaded an unprecedented level of ammunition to provide support, including its unlimited asset purchasing program. "The viral infection 'curve' in the United States remains unbent, with widespread disagreement about when to expect the number of cases to decline," Kostin said. As for the fiscal and monetary policy, the strategist noted "while the willingness of policymakers to use all the tools at their disposal is clear, only time will tell to what extent the actions succeed in limiting defaults, closures, and layoffs." More selling ahead Despite the deep rout, investors' equity allocation is still above the previous market bottoms in 2001 and 2008, suggesting the market will go through more pain before reaching a turning point, according to Goldman. 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 have highlighted that our US Equity Sentiment Indicator, which combines nine measures of equity positioning, had declined to just -1.4 standard deviations vs. -2 to -3 standard deviation readings at the troughs of other corrections this cycle. This week, the metric rose to -0.7, suggesting more selling lies ahead," Kostin said. To navigate the choppy road ahead, Goldman is repeatedly advising clients to buy stocks with a "margin of safety," a classic value investing strategy popularized by the likes of Warren Buffett and Seth Klarman. The bank screened the S & P 500 for companies with three key characteristics: size and liquidity, balance sheet strength, and attractive valuation. The list of stocks include Walgreens, UPS, Bristol-Myers Squibb and Intel. — CNBC's Michael Bloom contributed reporting Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.
A trader working at the New York Stock Exchange in New York, the United States.
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With the S&P 500 scoring its best three-day rally since 1933 last week, investors wondered if the massive bounce was a sign of the worst for the market is behind us. Goldman Sachs said not yet.