Of course, the chief strategist admits that the situation will be completely different, if Trump's tax reform is not adopted, S&P is likely to fall to 2,400 from current levels above 2,600.
Interestingly, even in discussions about the future, which do not include Goldman Sachs' assumptions about tax reforms adopted at the legislative level, or S&P forecasts, the bank is particularly optimistic and does not expect a bear market to appear as a result of 2017 being " the year of the golden mean, ”in which the world enjoyed a coordinated global growth in central bank liquidity inflows of $ 2 trillion.
But without a corresponding increase in inflation, which, combined with the collapse of world volatility, led to financial conditions in the USA that were almost never easier, and would be more characteristic of three cuts in rates, and not for three increase in rates.
As a result, Goldman is confident that if there is no shock, a bear market is unlikely, despite the growing risks.
What awaits Goldman in 2018
On the negative side, investors may point to a combination of an already mature economic cycle and a long bull market (mainly against the background of a weakened monetary policy). Valuations are stretched in most stock markets, especially in the US. These factors, along with the onset of (albeit moderate) quantitative tightening (QT), may also cause some concern.
On the positive side, investors can be reassured by the strength and longevity of the current economic cycle. Despite the fact that it was a long cycle, the weakening of the financial crisis also meant that, until recently, it had presented unsatisfactory indicators in terms of strength, as is often the case after financial crises.
This took place even in the United States, where the recovery was more sustainable than in other countries, and helped to contain inflationary pressures.
Goldman Sachs also explains that since bull markets do not die of old age, the indicator of the bull or bear market, which, as noted two months ago, is at the level that preceded the dot-com bubble and the 2007 global financial crisis. ., is largely ignored.
But besides rising inflation and / or inflationary expectations, Goldman foresees two other risks for its “rationally euphoric” forecast for next year. Overall, Goldman believes these are the three biggest risks to stocks next year:
- a situation where speculators are playing up, forced to sell shares at a low rate
- short correction
- rising inflation expectations
Regarding the first point, European Goldman strategist Peter Oppenheimer writes that the bank "has often heard from customers recently about the lack of active stock growth that is so often associated with market peaks."
He notes that investors fear they might be left behind in a recent attempt to maintain optimistic expectations, "as interest rates remain low and growth expectations continue to rise, further intensifying amid US tax reform."
Oppenheimer concludes that "there are many factors that suggest that a market decline is more likely." He emphasizes that now we are witnessing the second longest period since 1929, at least for the S&P 500, with profitability without correction of 5% or more.
Even with the risk of a correction or a “bear” market, investing is the best action, as we have found that anticipating market peaks by selling may be too “expensive” in terms of lost profits.
For example, on average, an investor who sells stocks just three months before the peak (in the US) misses a 7% price increase. This is approximately the same amount that an investor who continues to invest will lose in the first three months of the bear market.
Naturally, the aforementioned assumes a normal correction, and not a series of catastrophic market corrections predicted by resources such as Fasanara Capital, analysts such as Marko Kolanovich and others who anticipate a historic collapse that could lead to a comprehensive market closure as liquidity is depleted. Goldman then notes a more important point: any initial collapse is likely to see a sharp rebound in the early days of the bear market.
Almost all bear markets begin with a correction followed by a powerful rebound, which gives investors the opportunity to sell later, assuming, of course, that they recognize that this is an opportunity to sell, not buy.
The Power Bounce provided by Goldman Sachs is the result of shorts seeking to cover their positions and provide a natural recession in the market. This may not happen in the next bear market, as Goldman himself showed that short positions among hedge funds are approaching record low levels, since the tireless growth of the market over the past year has removed all but the most devoted “bears”.
This brings us to the next risk, inflation, and, as Goldman sachs suggests, "to adjust for becoming more stable – a deeper and longer bearish market – you should aim for higher inflation, raising interest rates and increasing recession risks."
This will lead to one terrible incident: on Saturday, Hans Lorenzen from Citi suggested that the Fed could be paralyzed even in the face of “real world” inflation, because at least “some central bankers that Citi spoke to” admit that they are afraid that they have lost control of the market.
This is a world that will lead to hyperinflation in both the real and financial economies, and possibly end in the collapse of both fiat money and the normal monetary economy, unleashing the next global financial crisis, as was recently voiced by Jim Reed from Deutshce Bank and Marko Kolanovich of JPM.
Nevertheless, in an attempt to avoid panic of customers and the sale of shares, Goldman offers a brilliant move: yes, the stock market may collapse, since it has never been so overvalued, but if this happens, it will reduce other assets, causing a catastrophic liquidation in all markets.
But here’s the climax: don’t sell, because it’s exactly where you are going to invest your money, or, as Oppenheimer says, “equity markets are high relative to historical performance, as are most asset classes, which means that they are all vulnerable to falls. "
As a result, according to the “logic” of Goldman Sachs, this is not even worth hiding. But there is one alternative: for specialists in investing in mixed assets, the preferred strategy remains to save cash as a hedge of revalued stocks, since the bear market in the inflation-oriented stock market will affect most financial assets, which will be difficult to hide.