Goldman On 2019: Risk Has Returned, Raise Your Cash Allocation

As stocks careen lower for a second consecutive day, erasing gains for the year, Goldman is out with their 2019 U.S. equity outlook and the title speaks for itself.

Earlier this month, the bank projected S&P EPS growth would dive to just 6% in 2019 from 24% in 2018 as the effects of stimulus wane and margin headwinds mount. While they do expect the S&P to move higher in the new year, their tone is markedly cautious.

Goldman’s year-end 2019 S&P target is 3,000, consistent with Barclays’ target, also released on Monday evening.

But that’s the “base case”, to which Goldman assigns a 50% probability. The “downside case”, which carries a 30% probability, calls for the S&P to close 2019 at just 2,500 as “earnings estimates are slashed and the P/E contracts to 14x.”

(Goldman)

Goldman goes on to emphasize that cash is becoming viable again, something we (and plenty of other folks) have been pounding the table on for months. The higher the yield on riskless USD “cash” and the tighter financial conditions, the less attractive risk assets become.

(Bloomberg)

Goldman’s baseline forecast calls for US stocks to post a higher 2019 absolute total return (7%) than cash (T-Bills, 3%) and 10-year US Treasuries (1%), but the bank cautions that “the risk-adjusted return for stocks in 2019 will be less than half the long-term average (0.5 vs. 1.1).”

(Goldman)

As far as Fed forecasts, Goldman is sticking with their call for hikes in every quarter in 2019, despite what the market interpreted as a dovish relent from Clarida on Friday.

Goldman believes investors should consider rethinking Overweights in equities, especially given that some folks appear to be overextended. Here’s the passage from Goldman’s outlook piece that is getting all the attention on Tuesday:

We recommend mixed-asset investors recalibrate their portfolios by reducing equity holdings and lifting cash allocations. Households, mutual funds, pension funds, and foreign investors have notably overweight equity exposure in their portfolios relative to history (see Exhibit 7). In aggregate, these entities have equity allocations ranking in the 89th percentile vs. the past 30 years. At the same time, these investors have cash allocations at the very bottom of their historical allocations, often ranking below the 1st percentile (see Exhibit 8).

There’s obviously a ton more to go over here, but the bottom line is the same as it’s been for at least six months. As Goldman puts it, “cash will represent a competitive asset class to stocks for the first time in many years.”

It’s Occam’s razor, folks. If someone asks you to explain exactly what’s going on in a world where nearly every asset class seems to be struggling to perform, you might consider just noting that USD “cash” is now an attractive alternative for the first time in as long as anybody can remember.

More simply: TINA is not only dead, but buried as well. Nowadays, there is an alternative. And that alternative is “cash.”

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Occam’s Razor.