Goldman Gives Three Reasons Why Investors Should Worry Less
(Bloomberg) -- Investors should just relax, according to Goldman Sachs Group Inc.
Appetite for riskier assets such as stocks and high-yield bonds has been suppressed by a number of factors that have come up around the same time, but the headwinds may be transitory, according to the New York-based investment bank. The firm’s economists point to the sideways movement in the S&P 500 Index since the early-February market meltdown as evidence that nervous traders are unwilling to take a stance.
“We see three reasons why risk assets should worry less,” Goldman economists Charles Himmelberg and James Weldon wrote in a note Thursday. “First, we maintain our conviction in the strong outlook for global growth despite the recent dip in global activity indicators. Second, concerns over monetary tightening are likely overdone. Third, the technical headwinds that have weighed on risk sentiment look likely to ease.”
Global growth might have moderated in the first quarter, but the economists said the U.S. should soon start to show strength from the fiscal stimulus enacted in December, and China, Brazil and India continue to look strong. And while markets have had to absorb a big change in Treasury yields, the bulk of the move is probably mostly done, they said.
Goldman also pointed to some technical factors producing headwinds that are normalizing, including pressure on short-term funding markets due to repatriation of cash parked in short-term credit, and reduced appetite for selling equity volatility. Also, they said nervousness about earnings should moderate now that reporting season is well underway and most companies have beaten expectations with increased cash available for share buybacks as well.
The economists did offer some caveats to their view, adding that risk-reward tradeoffs don’t necessarily look attractive, valuations remain high -- particularly in U.S. high-yield credit -- and there’s a growing risk of an overheated labor market and recession down the road.
“The unusually ‘friendly mix’ of strong growth and low inflation that in recent years provided such a potent boost to risk appetite cannot continue,” Goldman wrote. But in terms of fears about overheating labor markets and recession, “we are not there yet, and these risks may prove to be smaller than many fear,” they said.
All this points to a market that should ease up on the anxiety.
“Growth is likely to remain strong, despite its recent moderation,” the economists said. “Risk assets might begin to worry less.”
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