Goldman Sachs Says Growth Fears Are Causing the Equity Meltdown

(Bloomberg) -- Wall Street’s on a frenetic quest to uncover the culprit behind the global equity rout -- and a straightforward theory from Goldman Sachs Group Inc. is one of the more dispiriting.

Slice and dice cross-asset gyrations to filter out the noise, and the broader market signal is unmissable: Investors are tempering their growth projections as they price-in the era of higher rates and tighter oil supply.

“The biggest drag on equities -- particularly U.S. equities-- is U.S. growth, followed by global risk appetite,” strategists including Charles Himmelberg wrote in a note published Thursday. “Yesterday’s repricing of U.S. growth was an overdue gut-check following last week’s monetary and oil supply shocks.”

The strategists sifted 28 indexes across equities, rates, credit, currencies, and commodities through a clutch of macro indicators, including risk appetite, economic output, and the commodities outlook to divine the proximate cause for market moves.

The takeaway? The market maelstrom that’s now jumping through Asia and Europe reflects U.S. “monetary concerns” and recent oil-supply shocks -- exacerbated by an abrupt unwinding of crowded trades, according to Goldman.

Goldman Sachs Says Growth Fears Are Causing the Equity Meltdown

Notably, during February’s volatility spike, the bank’s macro model “recorded almost no change in U.S. growth views,” suggesting technical factors back then were at play.

The International Monetary Fund this week said global output is plateauing as it trimmed its growth forecasts for the first time in more than two years, citing Sino-U.S. trade tensions and turmoil in emerging markets.

Higher inflation-adjusted borrowing costs and extra premiums for equity risk tend to curb corporate valuations by reducing the present value of expected cash flows. It’s enough to send shivers down the spines of traders whiplashed by this year’s vanishing S&P 500 returns.

Goldman’s U.S. Financial Conditions Index, which tracks changes in interest rates, credit spreads, equity prices and the dollar, has tightened to May 2017 levels -- reflecting a more-challenging risk environment that may weigh on economic output.

Goldman Sachs Says Growth Fears Are Causing the Equity Meltdown

“Whereas investors previously thought the Fed would be slow to raise rates given the huge cost of a recession while still near the zero lower bound, risk premiums need to be adjusted higher to reflect increased odds that tighter policy slows the economy more than the Fed anticipates,” Evercore ISI strategists including Dennis DeBusschere wrote in a note.

Don’t hold your breath for a dovish monetary offset -- the Fed will stick to its hiking mission in order to smooth the business cycle, the strategists reckon.

“As financial conditions tighten and U.S. economic readings fall relative to the rest of the world, dollar strength should fade, favoring high foreign-sales stocks and emerging markets,” they wrote.

©2018 Bloomberg L.P.