The bear market in stocks is definitely not over, Goldman Sachs says
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Don’t get too comfortable, bulls.
While the Dow Jones Industrial, S&P 500 and Nasdaq Composite have struggled since August as investors worry about a tough Federal Reserve, all three major stock indexes are still off mid-June lows.
Some Wall Street professionals say the fact that stocks have yet to retest the bottom reflects optimism that the U.S. will avoid a recession in 2023, while the Fed is likely planning a soft economic downturn.
But Goldman Sachs chief strategist Peter Oppenheimer warned in a note that bulls should be on their guard because the bear market is not over yet.
“Our Bull/Bear Indicator (GSBLBR) and Risk Appetite Indicator (GSRAII) attempt to capture fundamental and sentiment factors that are important around pivot points,” Oppenheimer explained. “Combining these can provide a useful guide, especially when both are near extremes. With a GSBLBR below 45% and a GSRAII below 1.5, the probability of achieving high returns over a 12-month period is very high. The current levels of these indicators suggest that we are not yet at the bottom of the market.”
Here are the details behind Oppenheimer’s call in the bear market that’s still in play.
Reason #1: Prepare for continued high inflation and rising interest rates.
“Inflation may be near a peak, but inflation levels may remain elevated for some time, putting upward pressure on interest rates relative to current market pricing,” he wrote. “At the same time, our economists argue that there is a narrow path to a soft landing that requires policymakers to (i) slow GDP growth below potential to (ii) balance labor supply and demand. enough markets (iii) to slow wage growth and last inflation in hand.”
Oppenheimer added that “recent comments from the central bank and the Jackson Hole statement have again been hawkish: it said that while it is appropriate to slow the pace of tightening ‘at some point’, the FOMC remains committed to lowering inflation. Similar comments have been made in Europe.”
Reason #2: Slow growth continues.
“A strong private sector balance can help contain economic downturns, but many of the problems facing economies today stem from deep-seated supply-side problems, not demand-side issues,” the memo said. “It is not clear that the peak of interest rates alone offers a sustainable solution. At the same time, labor and commodity restrictions may well contribute to weakening growth and lowering profit margins. While recessions may still be relatively mild compared to many in the past, it is still more than likely that investors will be pricing in more recession risk as interest rates rise.”
Reason #3: Stock valuations aren’t cheap enough.
“As we’ll see in the next section, optimism about monetary policy and inflation is just one of the factors that typically trigger a recovery into the next bull market,” Oppenheimer wrote. “Valuation and positioning are also important. As other conditions that are typically in place before a sustained recovery are not yet evident, we view the current rally as temporary rather than a turning point that marks the beginning of a true “hope” phase.
Oppenheimer’s history lesson bear market, mind you.
“A bear market lasts an average of 44 days, and MSCI AC World returns 10-15 percent,” the note said. “Cyclicals outperform defenders 83% of the time and 4% on average. We find a similar result at the regional level; emerging markets outperform developed markets 67% of the time. There is no clear formula for Value vs. Growth or Small vs. Large Caps during this period.
The memo continued: “In this context, we believe that the rally that started last June 22 is a bear market rally. Its duration and magnitude were not unusual compared to the experiences of previous decades. We still expect weakness and bumpy markets before a decisive bottom is reached.”
From the Yahoo Finance Live archive: Oppenheimer gives stocks a cautious tone on Feb. 4.
Oppenheimer at the time (which has turned out to be correct): “The market is starting to differentiate a lot between different companies based on how they’re doing in terms of results and prospects. And I think that’s relatively healthy.”
Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and so on LinkedIn.
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