Goldman: Relax, This Isn’t 1987.

Welcome to the weekend and for the bulls, welcome to the head-splitting hangover that comes from a night of attempting to drink away the worst week for U.S. stocks in two years:

SPX

If you’re someone who was in high school during Lehman and thus aren’t used to this kind of thing, allow me to remind you that what you saw this week really wasn’t that dramatic. It can get a lot worse than that, so go back and grab your balls if you left them at your desk on the way to the bar last night.

And if you’re someone who is a rank amateur when it comes to being an alcoholic, allow me to remind you that there are only two sure-fire ways to beat a hangover:

  1. three shots of vodka in succession (if you can choke them down and not vomit, the wave of relief will wash over you within about 3 minutes as the alcohol starts to course through your veins);
  2. a half-pint of promethazine cough syrup, preferably mixed with 7 Up.

My guess is you don’t have the proper connections to obtain the latter without a prescription, so maybe go with the former.

Ok, so with that out of the way, I wanted to brighten your day with some ostensibly good news about equities. Goldman was out Friday evening with a new piece that seeks to dispel the notion that this year will turn out like 1987.

The bank starts by reminding you that even though “the 3.9% decline from last Friday’s close eclipses the 2.8% max drawdown of 2017, 2018 ranks as just one of 13 years since 1950 to start with a January return greater than 5%.” Apparently, that’s lead directly to some rather uncomfortable conversations with clients. Here’s Goldman:

The volatile start of 2018 surprised many investors and caused clients to ask if they should [A] raise their return expectations for the full year, or [B] expect a sharp correction. In particular, investors ask about the likelihood of a repeat of 1987, when a 13% January return and additional 20% rise through August were destroyed on Black Monday, Oct. 19, when the index fell by 20%. The full-year return was 2%.

Generally speaking, Goldman thinks that might be a bullshit comparison.

For one thing, the bank notes that “unlike in 1987, the equity market’s YTD rise has been driven primarily by accelerating earnings growth.” Upward revisions are of course tied to the tax plan. Notably, the bank says all of the S&P’s YTD returns are attributable to optimism on earnings, “whereas P/E expansion drove the entire index rise in January 1987.”

Besides that, Goldman says everyone seems to be ignoring the fact that there have been a dozen other instances since 1950 when returns in January were greater than 5% and if you look at those years, “1987 is the only one in which the February-December return was negative.” In fact, the median 11-month return is a whopping 17%:

GStable

Finally, the bank notes that given the global growth outlook, the prospect of higher oil prices and a weaker dollar, there’s as much as $8 in upside to their EPS forecast which, if you slap an 18X multiple on it, could put the S&P at 3,000 by year-end, notably higher than the bank’s “rational exuberance” target of 2,850.

GSTable2

So there’s some good news for you to start the weekend.

Now if only you could get rid of that headache and the lingering nausea.

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10 thoughts on “Goldman: Relax, This Isn’t 1987.

  1. Hey Heisy, do you read Jeff Snider over at Alhambra Partners? You’ve referenced his work before, but just to make sure, his blog is on their main page:

    http://www.alhambrapartners.com/

    Also, great job becoming a living caricature of the Wall Street salesperson. You make me miss my old firm.

    Rudy

  2. anyone besides me check the futures market yet?
    it’s 7pm here on the west coast. looking really ugly.
    about goldman–graphs tell a story that’s past tense.
    sometimes they right and sometimes they aren’t.
    to me it looks like goldman got long late in the game–not to worry.
    they will get out before the rest of us.
    in Mr. H’s blog is there anyone that believes this market “IS NOT DISCORTED”?
    is so please weigh in.
    i am short and it has been painful.
    did you see it coming? if so please copy and past–i would like to read.
    sb

  3. Pingback: Drivers for the Week in IV – Banyan Capital Management LLC

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