By Barbara Kollmeyer
After seven straight quarterly wins, the S&P 500 is about to log a 3% loss in the first quarter. The last losing quarter was a COVID-fueled 20% slump in March 2020,
But a 5% gain for March will make for the best month since October, and the index remains just 4% off its Jan. 4 highs.
It’s no mean feat for a market that was ready to cruise into a COVID-19 bounce, but instead got war, surging inflation and a Federal Reserve fired up to increase rates. Our call of the day , from a team at Goldman Sachs led by chief global strategist Peter Oppenheimer, warns this stock market’s best days are over for now.
While it’s perfectly understandable that investors may have missed this latest rally, Oppenheimer’s team sees “little upside in the short term” — the team’s end-2022 target is 4,700, just 2% above current levels.
“We continue to see this as a ‘fat and flat’ market environment — a wider trading range and lower returns than in the post financial crisis era. There remains risks of corrections in an environment in which equities continue to outperform bonds,” the team said.
In the near term, investors should watch second-quarter economic data and coming earnings for signs of trouble. Goldman economists see a 25% to 30% shot at recession in the U.S. over the next year, which could drive the S&P 500 to 3,600, or a drop of 22% from current levels.
As for where to invest now, Goldman brushes aside the growth versus value obsession and says focus on alpha — companies that can innovate, disrupt, enable and adapt. As well, look for companies that can deliver high and stable margins, instead of those with higher-revenue and record-high valuations that were chased in the last cycle.
Also important — building a wall around portfolios using broad diversification across assets, geographies and sectors, i.e. real estate and commodities. Hedging is also important, and with the VIX volatility index /zigman2/quotes/210598281/delayed VIX -1.44% below 20, S&P 500 puts — an option that offers the right to sell at a specific price by a specific date — are an attractive hedge. Defensive value and high-dividend yield stocks are another area they like.
Goldman also rattled off several reasons why stocks are holding up:
Equities are still providing the best yield in town as real interest rates remain deep in negative territory. “As the yields no longer protect against inflation, and capital losses undermine their ‘risk free’ characteristics, we believe there is a growing desire to reduce bondholdings in favor of real assets,” said the strategist.
As long as economies grow, revenues and dividends should as well, making equities a real asset.
Private-sector balance sheets are strong thanks to pandemic-led savings. Banks balance sheets are strong and corporate ones are healthy.
Relatively stable credit markets have kept systemic risks at bay, while debt servicing capacity is at its strongest in 30 years, which should keep dividends sustained, even if the economy weakens.
Fiscal spending and capital expenditures are increasing, notably in China and Europe. The Russian invasion has dramatically changed attitudes on military spending and energy security goals.
Valuations are now below long-run averages. While the U.S. remains a relatively expensive market, the priciest bits, such as unprofitable tech, have derated sharply amid rising interest rate expectations.
An unwinding of bearish positioning, notably among fast money accounts — often run by speculators who use leverage to pay for securities — has also been a contributor to those gains. “Our aggregate measure of cross-asset positioning and sentiment has turned increasingly bearish YTD, bottoming at 30% 2 weeks ago, which tends to indicate an improved asymmetry for risky assets,” said Oppenheimer and the team.