Goldman Says Boost Cash Even as U.S. Recession Fears Overdone

(Bloomberg) -- Investors should increase their holdings of cash even with fears of a recession in the U.S. this year likely to prove overblown, according to Goldman Sachs Group Inc.

With a risk-free rate of 2.4 percent on three-month T-bills, “cash represents a competitive asset,” with allocations likely near the lowest levels in 30 years for many investors, analysts including chief strategist David Kostin wrote in a research note Tuesday.

The bank recommended investors reduce holdings in bonds this year and remain invested in equities. Though U.S. stocks could come under further pressure, the Goldman strategists said they expect “positive U.S. economic growth will support continued earnings growth.”

“The potential exists for further equity market downside in the near term even if the recent equity market collapse does not lead to a recession,” the strategists wrote. “There have been four bear markets without a recession since 1946. During these episodes, the S&P 500 declined by an average of 21 percent for a period of 8 months. If the current episode follows that historical pattern, the S&P 500 could fall further in the next couple of months.”

Money market funds received $165 billion of inflows in November and December, the highest two-month flow since 2008, according to the note. In contrast, there were $42 billion of outflows from stock funds as investors “aggressively” rotated from equities into cash, the analysts wrote.

After a rocky 2018, U.S. stocks have rallied and bonds steadied so far this year as investors price in lower Federal Reserve rates for the first time in more than a decade.

Goldman Sachs cut its forecast for 10-year Treasury yields earlier this week by 50 basis points to 3 percent, saying they may have peaked for this cycle.

--With assistance from Cormac Mullen.

To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Andreea Papuc, Cormac Mullen

©2019 Bloomberg L.P.