The smartest guys and gals in the room are still overweight equities, you’ll be happy to learn. Or at least officially (outwardly).
There are caveats, though. Several of them. “Expected returns are lower, more range-bound and the risk of a correction is higher,” Goldman’s Christian Mueller-Glissmann said, in a new asset allocation update.
That has a kind of humorous “other than that, the outlook is great”-type feel to it. In fact, when you scan the piece (all 21 pages of it), it’s difficult to avoid making various quips, assuming you, like me, are prone to musing aloud despite there being no one around to listen. (I don’t know about any trees falling in forests, but I can tell you that if a guy sitting on the back deck staring at a deserted stretch of beach talks, but no one’s around to hear him, he still makes a noise. Then again, since I can hear myself I suppose I actually haven’t addressed the quandary at the heart of the forest thought experiment.)
Wry humor aside, what’s notable about the piece mentioned above is the extent to which it suggests the only thing buoying equities currently is monetary policy.
If you’re familiar with the bank’s research, you’ve probably seen them break down their Risk Appetite Indicator into its principal components in an effort to (and I’m quoting Mueller-Glissmann here) “extract the drivers of risk appetite across assets.” The annotated figure (below, from Goldman) illustrates that breakdown.
Growth optimism has trended lower, and Goldman’s economists slashed their second half outlook for the US economy citing more muted expectations for consumer spending after Q2’s spending spree.
As Mueller-Glissmann went on to say, “only the search for yield / monetary policy factor has been supportive for risk appetite, with US 10-year TIPS yields below last year’s lows again.”
Regular readers might recall my tongue-in-cheek “can’t lose” assessment from July 24. To wit:
This leaves one to ponder an almost comical scenario where equity investors can’t lose unless there’s another global lockdown. If growth worries persist, weighing on yields, keeping the curve predisposed to bull flattening and bolstering the fortunes of the same secular growth names that dominate the indexes, stocks hit records. If, on the other hand, bond yields rise and the reflation trade comes back as growth fears abate, stocks rise too, in a trade that’s part catch-up and part relief.
Writing in the same cited note, Goldman said that “despite the ‘reflation capitulation’, equities, at least the S&P 500 and STOXX 600, are hovering around all-time highs.” The bank flagged the yawning gap between yields and stocks (figure below).
“There were similar equity-bond gaps in 2014, 2016 and 2019, usually after a dovish Fed pivot,” Mueller-Glissmann remarked, before making similar points to those raised in the linked article from two weeks back.
“The current equity-bond disconnect has been due to the boost to long-duration secular growth stocks from declines in real bond yields,” he wrote. “This also helped broad indices, which have a larger weight in those stocks.”
Can’t lose. Goldman didn’t put it that way. Instead, they just “remain OW equities” with a list of caveats.
