Source: Jinshi Data
Macro and policy uncertainty have brought warning signs of further stock market volatility in recent weeks, but Goldman Sachs analysts said the risk of a sharper correction, or a drop into bear market territory, looks small.
According to the bank, there is a high risk of investors pulling out amid stretched valuations, a mixed macro outlook and policy uncertainty.
While these factors could spark volatility and erode returns in the coming months, Goldman Sachs said there is little reason to believe U.S. stocks will fall 20% from their recent highs.
“We believe that risk-adjusted returns for equities are likely to be low through year end. However, we believe bear market risk remains low and recession risk is relatively low, supported by a healthy private sector and an accommodative Federal Reserve,” analysts wrote in a note Tuesday.
They noted that the risk of a drawdown has risen to about 20%, which is still relatively low . The analysts said history shows that a risk of more than 30% would be a "clear warning sign."
“ We have a slight risk appetite over the next 12 months ,” the analysts said.
They also noted that bear markets, characterized by pullbacks of more than 20% from recent highs, have become less common since the 1990s because of longer economic cycles, lower macro volatility and a larger policy “cushion” from the Federal Reserve.
The firm's outlook comes as U.S. stocks have swung wildly in recent months amid volatility sparked by weaker-than-expected macro data. Stocks sold off sharply in early August following the July nonfarm payrolls report, and last week the S&P 500 had its worst week in more than a year after a slightly weaker-than-expected August jobs report sparked fresh growth concerns.
Regarding the extent of the Fed's rate cut, Goldman Sachs Chief Economist Hatzius said on Monday, " I would not rule out a 50 basis point cut, but a 25 basis point cut is more likely ." Hatzius added, " I think the Fed has good reason to cut interest rates by 50 basis points because the current federal funds rate is too high . This is the highest policy rate in the G10. This is despite the fact that the United States has actually made greater progress in inflation than most G10 economies."
But Hatzius and his colleagues believe that such a "big killer" move could hurt market sentiment.
"We believe such an aggressive rate cut is not warranted based on the data we have available," Aditya Bhave, U.S. economist at Bank of America, said in a client note. "Moreover, if the Fed starts with a 50 basis point rate cut, any less dovish forward guidance, whether through Fed officials' speeches or the dot plot, may lose credibility ."
Investors widely expect the Fed to start cutting interest rates at its policy meeting next week. According to the CME Group’s “FedWatch” tool, most expect the Fed to cut rates by 25 basis points, with markets pricing in a 100 basis point cut by the end of the year.
