7 Takeaways from Our Day with Goldman Sachs

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By Debra Taylor, CPA/PFS, JD, CDFA™

Goldman Sachs recently held their Semi‐Annual Roundtable for a select group of financial advisors, providing us full
access to the insights and thoughts of their top Portfolio Managers and Economists. Here are the 7 biggest takeaways
from our discussions:

1. Consumers & Businesses Remain Healthy Despite Market Volatility
Although there has been no shortage of doom and gloom in the capital markets so far in 2022, the Goldman
economists made a point that there remains nothing structurally or fundamentally wrong with the economy, the
consumer, or the capitalization of corporations. In contrast, the fundamental backdrop of the economy points
towards economic strength in the US over the coming years.

For one, corporations have maintained healthy debt exposure and default rates remain less than 2%, signaling health amongst big businesses and banks. For the consumer, there remains a healthy buffer between income
and spending. While elevated due to price increases in food and gasoline, credit card utilization also remains at
historically normal levels. The average credit score in the US is currently at 714, which is near all‐time highs. All
in all, Goldman emphasized that the bones of the economy remain healthy, despite what you may see on the
news.

 

2. Risk of a Significant Recession is Minimal
After expressing their confidence in the health of the economy and the consumer, Goldman did note that a
recession, while not currently the base case, is possible. They expect any recession that occurs to likely be
shallower than prior occurrences and likely only a “recession” in technical terms (two quarters of GDP below
zero). Following a year where GDP increased dramatically (2021 US GDP Growth: +10.1%), Goldman believes
that a minimal retrace may be warranted and should not cause consumers to panic.

With that said, Goldman’s current forecast for 2022 US GDP growth remains at +1.9%, and they restated that
the risk of a reversal in the economy’s health, resulting in a significant recession, remains minimal.

3. Municipal Bonds Becoming Attractive as Interest Rates Continue to Climb
An asset class that has largely fallen out of favor since interest rates were plunged to near zero in 2020,
Goldman believes it may be time to consider Municipal Bonds for conservative‐leaning and high‐income clients.
Yields are meaningfully higher than at the beginning of the year, with interest rates for Municipal Bonds
increasing from less than 2% to 4%, 5%, and even 6% for some lower‐grade bonds such as double & triple B (BB
& BBB) revenue bonds.

To highlight the benefits of the tax‐free nature of Munis for high‐income families, consider the following: For a
household in the 32% federal tax bracket, a Municipal bond with a 5% tax‐free yield equates to a “taxequivalent
yield” of 7.35%.

From a risk standpoint, Goldman highlighted that many US states have become flush with cash and tax receipts
and are ahead of budget, allowing for enough rainy‐day funds to cover any shortfalls. Additionally, with the Fed
committed to fighting Inflation, Goldman sees a steady increase in interest rates continuing through the
remainder of 2022 and 2023.

4. Commodities May Still Have Room to Run
With unprecedented bloodshed in both stocks and bonds throughout 2022 (so far), Commodities have been the
only major asset class to deliver positive returns, with many commodity funds delivering +20‐30% through the
first half of the year. Over the same period, stocks and bonds have fallen in lockstep, with most major indexes
down greater than 10%. Since the June highs, commodities have faced significant volatility, but Goldman
believes the recent volatility is a minor pullback in a broader, potentially multi‐year, bull cycle.

The Commodity team at Goldman believes that fundamentals support commodity prices moving significantly
higher. They highlighted the impact of the war in Ukraine on energy and agriculture prices, and that China
reopening post‐Covid lockdowns earlier this year will increase demand for commodities at a time when
inventories for many industrial metals are at or near all‐time lows. Goldman also sees Crude Oil reaching $140
per barrel and settling near $130 per barrel within the next 6‐8 months. They believe base metals (such as
Copper, Nickel, and Aluminum) will also move higher.

5. Navigating International & Emerging Markets Investing
Investing passively outside the US has not yielded strong returns compared to investing domestically over the
past decade. Goldman believes it may continue to be difficult in the short term due to European energy crises,
major economic woes, and the unrelenting strengthening of the US dollar.

However, Goldman stressed that there are opportunities available in International and Emerging Markets for
savvy investors who can navigate those areas (while avoiding distressed companies). This ability to navigate is
where Active Management has proved to be crucial (especially in 2022), as passive International and Emerging
Markets indexes have underperformed and, frankly, are full of poor businesses.

On a positive note, Goldman highlighted several catalysts that could finally allow Emerging Markets to see
strong economic growth and potential market outperformance versus the US:
 A quickly growing middle class as the source of the next growth phase
 Young, wealthy citizens translating to earnings growth
 Innovations in technology continue to spawn from Emerging Markets countries
 China seeing robust economic growth following the next election cycle
 Goldman predicts the dollar to stabilize or weaken from current levels, which would be a strong
tailwind for EM

6. Inflation is Hot, but may Cool by the End of 2022
One of the most pertinent topics in the world is Inflation and how it has continued to overshoot expectations
month after month. Most recently, the June year‐over‐year inflation numbers of 9.1% eclipsed the May
numbers, led by price increases in energy, food, and housing. These price increases have hit consumers hard,
forcing the Federal Reserve to take action to attempt and combat continued price increases with rate increases.
Goldman acknowledged that their inflation estimates have been off the mark in 2022, based on several
unpredictable factors such as the war in Ukraine and Chinese Covid lockdowns.

Despite their incorrect inflation predictions so far in 2022, Goldman does expect Inflation to begin tapering off
the highs in July due to (1) resolutions in global supply chains and (2) higher inflation watermarks to compare
against year‐over‐year comparisons. Goldman expects the Headline CPI (Consumer Price Index) to end 2022 at
around 6% and continue to trend downward throughout 2023.

7. The Value of Staying Invested During Downturns
A theme that recurred throughout the entire Roundtable Discussion was the need to take a long‐term view
when investing during a bear market (or period of market downturn). Each Goldman speaker took a slightly
different approach to this message, but they all had the same underlying thesis: diversified investors who stay
invested win over the long term.

To support this thesis, the speakers highlighted a myriad of different statistics covering market performance
during and after a bear market. For example, The S&P 500 has historically returned an average of +20.5% one
year following a bear market, with ten out of thirteen occurrences (77%) resulting in positive returns.

The speakers also highlighted the difficulty of timing the market and the cost of missing the best days of market
performance, with many of the best days coming immediately after the worst days. A hypothetical investor who
remained fully invested in the S&P 500 has returned +9.52% annually over the past 20 years, and an investor
who missed the 15 best days returned only 3.87% annually. That is a 5.65% difference every year over the
course of 20 years, just for missing the best 15 days.

Conclusion

Our conversations with the Goldman managers and economists proved to be full of relevant data and narratives that we
will continue to utilize to build out our investment theses moving forward. As always, feel free to contact us with any
questions.

A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market
value of 500 stocks representing all major industries.

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities
mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed
to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot
invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects
of inflation and the fees and expenses associated with investing.

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