These Are The Three Things Goldman's Clients Are Most Worried About

After two weeks of violent market whipsaws, which saw the S&P rally by 5% two weeks ago, then drop by the same amount last week with the VIX surging to 23, Goldman's chief equity strategist David Kostin writes that the bank's clients remain nervous with concerns rising over three key market themes: US-China trade relations,  the pace of Fed tightening, and concerns about recession.

To be sure, there is reason to be worried - as Bank of America summarized over the weekend, following the second 10% correction of the S&P in 2018, "the capitulation has begun", and while "everyone is bearish, nobody is short." This has led to a jump in market swings - a traditional late-cycle indicator - with the S&P 500 having no less than 56 daily moves of more than 1% this year, versus only 8 last year and a calendar-year median of 49 since 2010. Additionally, as Driehaus Capital notes, the S&P has also had more 2% and 3% daily moves than any year since 2011 as traders scramble to jump on directional momentum, only to find none exists.

Adding to the confusion is that while a recession - according to most - remains unlikely in the short to medium-term, the US economy is clearly slowing down as the latest print of the Citigroup US Econ surprise index demonstrates.

Additionally, while November payroll growth was softer than expected, other economic data remained firm: the ISM manufacturing index rebounded to 59, with particularly strong New Orders (62), and the ISM non-manufacturing index was higher than expected, and as the chart below implies, the S&P 500 appears to have priced in a more drastic slowdown in economic growth than what manufacturing surveys expect.

So what is Goldman advising its confused clients to do now?

According to Kostin, with an increasingly uncertain economic background, coupled with renewed concerns about the US-China trade war and the Fed's balance sheet, in 2019 Goldman expects "a continued environment of low risk-adjusted US equity returns."  As the bank outlined in its 2019 outlook, it forecasts a combination of modest absolute returns to the S&P 500 and elevated risk.

Our baseline forecast is for US economic growth of 2.5% and earnings growth of 6% to drive the S&P 500 to 3000 by year-end 2019. If realized S&P 500 volatility matches the 30-year average, the risk-adjusted return in 2019 for the S&P 500 would equal 0.5, well below the long-term average of 1.1.

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Thorgood 9 months ago Member's comment

btw our economy is NOT slowing down. It is the pressure from outside our borders that MAY impact our growth in 2019 but it's all a big guess. worry about it when it happens.

Thorgood 9 months ago Member's comment

given those three concerns zippy the chimp must be a client. How stupid.