El
Goldman Sachs Global Investment Research 2
Top of Mind Issue 75
Macro news and views
US Japan
Latest GS proprietary datapoints/major changes in views
We lowered our probability-weighted fed funds rate forecast for
2019 to 0.7 net hikes (vs. 1.1 previously) and our modal forecast
to 1 hike (vs. 2) given January’s dovish FOMC meeting.
We lowered our Q1 GDP forecast by 0.2pp to 1.7% qoq ann.
and raised our Q2 forecast by 0.2pp to 2.4% to reflect the
impact of the government shutdown.
Datapoints/trends we’re focused on
Little evidence that trade policy has weighed on economic
activity, though it has likely boosted core inflation by ~0.15pp.
Latest GS proprietary datapoints/major changes in views
No major changes in views.
Datapoints/trends we’re focused on
The BOJ’s relatively bullish base case for growth/inflation,
despite acknowledging heightened risks at its last meeting.
The impact of China’s slowdown; exports to China fell by
13.8% yoy in December, and some manufacturers cited
China weakness in the January Reuters Tankan survey,
which declined for the third straight month.
A sharp deterioration in consumer confidence in January.
A dip and a rebound
Real federal spending around US gov’t. shutdowns, % chg. ann.
Trade (head)winds
Japanese export volume by region, % yoy
Source: Department of Commerce, Goldman Sachs Global Investment Research.
Source:
Ministry of Finance.
EuropeEmerging Markets (EM)
Latest GS proprietary datapoints/major changes in views
We raised our subjective probability of a “no-deal” Brexit to
15% from 10% and lowered our odds of no Brexit to 35% from
40%. We left our odds of a delayed Brexit deal at 50%. Given
political uncertainty, we now see November, rather than May,
as the most likely month for a BOE rate hike this year.
Datapoints/trends we’re focused on
Growing risks that the ECB raises rates later than our base case
of Q4, particularly since the bank acknowledged that risks to
Euro area growth are skewed to the downside.
Latest GS proprietary datapoints/major changes in views
We now expect a cut from India’s central bank in February
(vs. no change) on softer growth and subdued inflation.
Datapoints/trends we’re focused on
A significant rebound in EM ex-China activity from Q3 lows.
China’s relatively limited policy easing despite slowing activity;
we expect further stimulus including lower rates and
infrastructure spending to eventually help stabilize growth.
Reduced pressure for rate hikes across EM given the Fed’s
dovish turn; however, the bar for cuts remains high.
After the strike
Impact of one week of strikes on French CAI (annualized), pp
EM accelerating alone
Contributions to the change in global CAI from Sep.-Dec. 2018, bp
Source: National Opinion Polls, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.
-25
-20
-15
-10
-551525
Previous Four
Quarters
Shutdown QuarterShutdown
Quarter+1
Shutdown
Quarter+2
Federal Consumption, 4Q95Federal Investment, 4Q95
Federal Consumption, 4Q13Federal Investment, 4Q13
-30
-20
-101030
2013201420152016201720182019
ChinaUSEU
-0.3
-0.2
-0.10.1
0.2
0.3
0.4
0.5
-1Start of Strike123
CAI
Hard CAI
Soft CAI
Months
-40
-30
-20
-101030
40
EMs ex ChinaRest of DMEuro AreaChinaUS
34%12%15%19%19%
of worldof worldof worldof worldof world
We provide a brief snapshot on the most important economies for the global markets
El
Goldman Sachs Global Investment Research 3
Top of Mind Issue 75
What a difference a month can make. After the most volatile
Q4 since 2011, markets have enjoyed a strong start to 2019 in
large part owing to a Fed that seems increasingly willing to
come to the rescue. But sentiment still seems less ebullient
than a year ago, and investors remain nervous about slowing
growth. Against this backdrop, how to interpret the recent price
action—and whether it signals a turning point in the cycle—is
Top of Mind.
We begin by asking Howard Marks, long-time investor and co-
founder of Oaktree Capital Management, what to make of the
Q4 market volatility. He argues that the sell-off confirmed little
more than the power of market psychology. In his view,
investors had grown too optimistic about the economic outlook
and too comfortable with risk over the course of 2017-2018;
this set asset prices up for an inevitable correction to let some
“hot air” out of the balloon. While sentiment was “chastened,”
Marks believes investors are back to being relatively optimistic,
and therefore recommends a cautious stance. (That said, he
does not think a US recession is imminent, nor does he
anticipate a 2008-style market crash.)
Sentiment swings
Investors Intelligence survey of bearish and bullish sentiment
Source: Investors Intelligence. Special thanks to the multi-asset strategy team.
GS Global Head of Commodities Research Jeff Currie agrees
with the view that sentiment, rather than fundamentals, drove
last year’s volatility. He points out that “soft” survey-based
data (e.g., confidence indices, PMIs) fluctuated significantly in
2017-2018, while hard economic data (e.g., sales, industrial
production) remained relatively stable. Currie believes this is
emblematic of a new, post-crisis backdrop in which markets
are increasingly divorced from fundamentals; in his view,
factors like technology have made traditional economic cycles
smoother and less forward-looking, leaving shifting sentiment a
more important driver of market volatility.
GS Chief Markets Economist Charlie Himmelberg offers a
somewhat different perspective. He thinks investor optimism
in early 2018 was warranted. And he ascribes the volatility that
followed to a combination of real and sentiment-driven factors:
namely, slowing growth amid worries about an “inflexible”
Fed. Clearly, the Fed’s recent dovish pivot has gone a long way
in appeasing these fears.
So now that the markets have settled again, what kind of
environment can investors expect for the months ahead Our
multi-asset strategists, Christian Mueller-Glissmann and Alessio
Rizzi, caution that the normalization of risk sentiment may lose
steam without better macro data. But given that our
economists continue to expect a stabilization in growth,
Mueller-Glissmann and Rizzi recommend investors remain
modestly pro-risk (overweight equities and commodities, as
well as cash).
For equities in particular, GS Chief Global Equity Strategist
Peter Oppenheimer maintains that the current cycle has more
room to run, and he does not see the current rally as the kind
of “bear market bounce” that typically precedes sustained
declines. For one, he notes that other large post-crisis sell-offs
comparable to last year’s led to long rallies (think 2015-2016).
And, more importantly, he points out that sustained bear
markets are unlikely outside of a recession, which we aren’t
expecting. Nevertheless, like Marks, he paints a somewhat
sober picture for investors in 2019, with low equity returns and
significantly weaker profit growth than in recent years. He
therefore recommends investing in companies with strong
balance sheets and a track record of stable growth.
As for equity volatility, the best advice for investors may
(unfortunately) be to expect the unexpected. Just as Currie
sees the traditional business cycle as a less reliable framework
today, GS Equity Derivatives Strategist Rocky Fishman argues
that the concept of volatility regimes is less relevant than it
once was due to high vol-of-vol. Indeed, 2018 proved that
volatility can transition swiftly from sharp increases (February)
to very low periods (Q3) and back again (Q4). However,
Fishman notes that that the floor for the VIX seems to be
moving higher with every new spike, and recommends VIX call
options for investors who want to hedge against the next
volatility episode.
Our key takeaways from all of the above The market cycle is
probably not at a major inflection point, but returns across
assets will likely be considerably weaker going forward. More
broadly, the shifting nature of “cycles” will be important as
investors gauge where the markets and economy go next.
Allison Nathan, Editor
Email: allison.nathan@gs
Tel:212-357-7504
Goldman Sachs and Co. LLC
1030
40
50
60
70
06081012141618
BullishBearish
Global
financial
crisis
Where are we in the market cycle
El
Goldman Sachs Global Investment Research 4
Top of Mind Issue 75
Howard Marks is the co-founder and co-chairman of Oaktree Capital Management. He has
published widely, including his latest book,
Mastering the Market Cycle
(October, 2018). Below, he
argues that investor attitudes towards risk are a valuable gauge for assessing where we are in the
cycle, and thus how smart investors should behave. He also argues that excesses in the credit
markets are a key source of risk to the economic expansion.
The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.
Allison Nathan: What do you make
of the recent market volatility
Howard Marks: To me, it just
confirms that markets are
psychologically volatile. On October 3,
everything was fine; on October 4, the
equity market began one of the
biggest declines ever seen over such a
short period of time, leading to the
worst December since the Global Financial Crisis (GFC).
Fundamentally, of course nothing had changed overnight, and
not much has changed even over the prior few months; mostly
it’s just that the market swung from looking at things
optimistically to looking at them pessimistically. The truth is,
most things can be viewed either positively or negatively, and
the bias of onlookers influences which perception prevails at
any point in time.
All that said, I have argued since roughly mid-2017 that markets
were excessively optimistic. And excessive optimism, faith in
the future, and greed leave the market vulnerable to this type
of sentiment-driven correction. So this episode just illustrates
how much market violence emotion can wreak, especially from
a place of too much exuberance.
Fundamentally… not much has
changed… it’s just that the market swung
from looking at things optimistically to looking
at them pessimistically.”
Allison Nathan: How do you determine whether or not
markets are too exuberant
Howard Marks: By assessing how people are thinking and
behaving around you. In general, as investors, we can’t predict
where we’re going, but we should be able to tell where we are.
We can do that by “taking the temperature of the market”
through questions like: Where does market psychology stand
To what extent has this psychology been priced in Are
attitudes toward risk prudent or cavalier Answering these
types of questions doesn’t help predict the future, but it does
help investors get the odds on their side, because they are
better able to determine whether markets are more exposed to
upside potential or downside risk. And in my assessment, last
year the markets were more exposed to downside risk.
Allison Nathan: But couldn’t at least some of last year’s
optimism have been fairly attributed to strong US
economic growth
Howard Marks: What matters most to markets is not a good
quarter or a good year, but what the future looks like. Case in
point, last year we had some of the fastest US economic
growth since the GFC, but some of the worst market
performance. In my view, the economic strength post the US
tax bill was like a shot of adrenaline in the economy; far from
creating a stable platform for more rapid growth, I thought it
would give us a couple of good quarters before either receding
or necessitating more restrictive actions from the Fed to avoid
excessive inflation. But people reacted very positively to it,
and—most importantly—they extrapolated into the future the
strong growth we were experiencing. I was getting email from
people saying, “Look at Australia—they haven't had a
recession in 26 years. Maybe the US won't have a recession
for 26 years.” That kind of Pollyannaish thinking told me there
was too much hot air in the balloon. When assets begin pricing
in the notion of permanent prosperity, it usually turns out to be
an illusion.
When assets begin pricing in the notion
of permanent prosperity, it usually turns out
to be an illusion.”
Allison Nathan: Does this kind of behavior suggest to you
that we are nearing the end of the economic expansion
Howard Marks: I'm not an economist, and I don’t believe in
forecasting; as investors we never know what’s going to
happen, like I said, but we can know something about the
odds. We're in the second half of the 10th year of an economic
recovery, and US economic recoveries have never lasted more
than 10 years. That doesn't mean that on the 10th anniversary
of the current expansion iron gates will come down and the
economy will descend into recession. My guess is that this
recovery will indeed turn out to be the longest in history, and
thus that more Fed rate hikes to correct late-cycle excesses are
probably in store. I would be shocked if today's interest rates
are the highest of this cycle. But the odds that the expansion
goes on much longer are not great. And knowing that, we can
feel somewhat confident that over the next few years, we’ll
probably see slower growth and—at some point—a recession,
which means pessimism will likely predominate over some
period of time, just as optimism has in recent years.
Allison Nathan: What does this mean for markets
Howard Marks: Two questions I’m often asked are: “Are we
in a bubble” and “Are we going to have another crash” This
is understandable because those who came into the market as
much as 25 years ago have seen two bubbles and two crashes.
Interview with Howard Marks。。。。。。