Trump and Goldman Are Warning About the Same Thing in the Market
(Bloomberg) -- The Trump administration may have once said Goldman Sachs Group Inc. economists look almost “like the Democratic opposition,” but the U.S. president appears to be in agreement with the firm when it comes to concerns about a liquidity drain.
In a tweet sent Tuesday morning, President Donald Trump warned that continued monetary tightening from the Federal Reserve risks making the market “more illiquid than it already is.”
Meanwhile, dwindling liquidity is a danger that Goldman Sachs flagged for U.S. stocks. In a research note to clients, strategists led by John Marshall and Rocky Fishman said much of the dislocation between this year’s equity volatility and economic drivers can be explained by a lack of liquidity.
While many factors such as the rise in electronic trading and regulations could have affected liquidity, Goldman says risk aversion among money managers has played a role in this year’s decline. As a result, a measure of liquidity for single stocks has fallen 42 percent over the past year, hovering near the lowest level since the global financial crisis, while the measure for S&P 500 futures tumbled 70 percent to a decade low, they note.
“In contrast to the 13.4 volatility implied by our economic model of volatility, the latest liquidity conditions suggest volatility of 19.1” over the next year, the strategists wrote. “High recent volatility, low volumes and market depth far below history all contribute to an above average volatility expectation.”
Turbulence erupted this year as worries grew over everything from U.S.-China trade tensions to the Fed’s rate path and a slowdown in corporate earnings. The Cboe Volatility Index, or VIX, has averaged 16.2, compared with 11.1 last year.
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