In what has been an extraordinary year, and despite a sharp bounce back from the sharemarket lows in March 2020, Goldman Sachs (GS) provides 10 strong reasons why they think US equity markets can continue to move higher from here.
GS issued their report earlier this week, 7th September 2020, after last week’s sharp declines.
Quite rightly they highlight markets are currently susceptible to a pull back given their strong run since earlier in the year. Nevertheless, over the longer term they think there are good reasons for them to move higher.
GS provide context in relation to the current market environment.
Firstly, the current global recession is unusual, not only to how sudden, sharp, and widespread the recession has been, also that it was not triggered by economic or market factors. The recession was caused by government actions to restrict economic activity to contain the coronavirus.
Secondly, GS provides analysis as to the characteristics of the bear market (sharemarket fall of greater than 20%) earlier in the year. They note it was characteristic of an “event driven” bear market (other types include structural and cyclical). GS note that event driven bear markets typically experience falls of ~30% and are generally shorter in nature. A sharp fall is often followed by a quick rebound. They estimate that on average event driven bear markets take 9 months to reach their lows and fully recover within 15 months. This compares to a structural bear market which take 3-4 years to reach their lows and around 10 years to recover.
See this Post for the history and comprehensive analysis of previous bear markets by Goldman Sachs: What too expect, navigating the current bear market.
GS also see lower returns than historically in the current investment cycle, this is expected across all asset classes.
Reasons why the current bull market has further to run
Goldman Sachs provide 10 reason why the current bull market has further to run.
Below I cover some of their reasons:
- The market is in the first phase of a new investment cycle. GS outline four phases of a cycle, hope, growth, optimism, and despair. They see markets in the phase of hope, the first part of a new cycle. 2019 had the hallmarks of optimism. The hope phase usually begins when economies are in recession as investors start to anticipate an economic recovery.
- The outlook for a vaccine has become more likely. This is a positive for economic growth. This combined with the expansionary policies by governments and central banks suggest economies will recover.
- The Policy environment is supportive for risk assets, including sharemarkets.
- GS economists have recently revised up their economic forecasts. This will likely lead to upward revisions to corporate earnings, which will help drive share prices higher.
- Their proprietary analysis indicates there is a low level of risk for a new bear market, despite current high valuations.
- Equities look attractive relative to other assets. Dividend yields are attractive relative to government bonds and in GS’s view cheap relative to corporate debt, particularly those companies with strong balance sheets.
- Although higher levels of inflation are not likely in the short/medium term, Equities offer a reasonable hedge to higher inflation expectations.
- They see the technology sector continuing to dominate as the digital revolution continues to gather pace. They also note that many of the large tech stocks have high levels of cash and strong balance sheets.
This article by the Financial News provides a good review of Goldman Sachs’ 10 reasons why the current bull market has further to run.
In my last Post I looked at the investment case for holding government bonds and fixed income which might be of interest.
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