Goldman’s not bearish, but they aren’t bullish either.
The bank remains risk neutral, according to an asset allocation update penned by Christian Mueller-Glissmann, who said that although there may be opportunities in carry and relative value, it’s best to be prudent and “selective.”
Markets are rather plainly in a “good news is bad news” macro regime, Mueller-Glissmann remarked, reiterating familiar talking points.
Goldman recently cut their subjective US recession odds for the third time in as many months. A downturn over the next year is now no more likely than it otherwise would be based on the frequency of post-War recessions, according to Jan Hatzius. “This points to further potential for rates markets to price out latent recession risk,” Mueller-Glissmann said.
The figure above shows US equities have recently become positively correlated with recession risk.
So, fading recession odds are accompanied by falling stocks, in part because market participants are concerned about the read-through for rates and bond yields (i.e., a longer stay at terminal for the Fed and higher long-end yields).
At the same time, the soft landing narrative, by virtue of becoming the shadow consensus, is probably in the price. “While a US soft landing has become more likely, it might be less of a tailwind for risky assets from here if upward pressure on bond yields continues,” Mueller-Glissmann wrote.
The bank’s risk appetite indicator is still loitering well above survey-derived measures of global services and manufacturing activity.
Interpretation is complicated in this case, though. “Despite continued positive flows into bonds, bond yields increased during the summer, in particular longer-dated bond yields,” Mueller-Glissmann said, adding that “based on historically negative equity/bond correlations, our RAI treats rising bond yields as a ‘risk on’ signal, but since the COVID-19 crisis this has not been the case — higher bond yields materially weighed on equities in 2022.”
That’s somewhat ironic. Mueller-Glissmann (and his team) have noted on countless occasions that the “historically negative” equity/bond correlation is actually a fairly recent phenomenon. An entire generation of investors was raised to believe in that reliable correlation, but it’s only been reliable for the past 25 or so years.
Anyway, Goldman’s view is that “risky assets are already reflecting a more benign macro backdrop” and the newsflow in that regard could be “less friendly” (as Mueller-Glissmann put it) over the near-term, particularly given growing stagflation risk in Europe.
“Risk premia are relatively low and our risk appetite indicator remains at positive levels, ahead of recent growth data,” Mueller-Glissmann went on. “As a result we think risky assets are struggling to digest rate increases.”
Cash remains Goldman’s only model portfolio Overweight.