Goldman turns cautious on stocks as Fed threatens to upset calm

HONG KONG: The longer the seemingly unstoppable reflation rally continues, the more warning signs start to flash for Goldman Sachs Group Inc – especially in stocks.

The bank’s strategists have lowered their three-month outlook for global stocks to neutral, while staying overweight cash and underweight bonds given the recent shift by central banks to a “slightly more hawkish” stance.

The Federal Reserve is forecast to raise its benchmark interest rate in an environment where markets are demonstrating historic calm.

“With growth momentum nearing its peak and rates increasing further with a hawkish Fed, the asymmetry for equities is turning increasingly negative,” Goldman analysts including Christian Mueller-Glissmann wrote in a note for institutional clients.

“A slowing cycle makes equities more vulnerable to higher rates and also shocks, for example, from European politics, US policy, commodities or China.”

After a blip to start the year, strong macroeconomic data including US jobless claims at a 44-year low have given investors renewed confidence to buy stocks, the analysts said.

Valuations have been supported by “very low” bond yields, but a negative rate shock “looms large” as inflation accelerates, they wrote.

“At some point, rising bond yields will become a constraint on equities,” Peter Oppenheimer, a contributor to the report, said in a separate interview.

Bond yields are still some way away from normal levels in Europe and Japan, “but in the US we’re getting much closer to that,” he said.

The Goldman analysts also warned about trading dynamics in equities. Historically low volatility has pulled in “risk parity funds” that take their cue from risk levels, according to the team.

“Commodity trading advisors” who gauge trends or momentum and use futures also tend to pile in to markets with low volatility and established trends, they wrote.

“In the event of a reversal of the trend, these systematic investors are likely to reduce equity exposure quickly, which could exacerbate an equity drawdown and result in a faster and larger volatility spike,” the Goldman analysts wrote. — Bloomberg