Debbie’s Day at Goldman Sachs

Published by Taylor Financial Group

Last week, I spent the day at Goldman Sachs meeting economists and listening to portfolio managers.  At the meeting, Candice Tse, Senior Market Strategist, spoke to us about the markets and she shared with us the four investment themes that Goldman Sachs is watching in 2017.

Globalization Is Great, But It May Be Time to Get Country Specific

Goldman Sachs is expecting stronger growth that is broader and deeper around the globe.  We are seeing this ring true already in 2017, as we saw Europe post economic growth of 1.4% domestically for the first quarter.  Goldman is expecting Europe and Japan to continue to post stronger growth numbers than the US which could present opportunities for clients.  This is a trend that we have discussed with our clients and for many we have raised international and emerging market allocations across their portfolios since the beginning of the year.

Stagflation Moving to Inflation

Despite seeing stronger economic growth, Europe’s inflation picture is ugly, especially in the United Kingdom, due to its weak currency.  However, domestically, US inflation has improved this year and is moving towards the 2% long term target of the Federal Reserve.  This could continue to help the domestic equity markets allow the Federal Reserve to continue incrementally raising interest rates and deleveraging their balance sheet.

A Shift from Monetary Policy to Fiscal Policy (from the Federal Reserve to Taxes)

While there is still divergent policy globally, most foreign banks are speaking about slowing down the expansion of their balance sheets.  The markets have also priced in another rate hike in November and December and Goldman projects the ten-year Treasury may approach 2.75% by year end.  Goldman believes the markets are going to focus more on fiscal policy reforms than holding on to every announcement of the Federal Reserve to guide the markets.  Goldman Sachs has their eye on tax reform, infrastructure spending, and health care reform as the major initiatives that will affect growth and move the markets for the rest of the year.

A Shift to Deregulation

There are lots of bottlenecks in the legislative arena which are being amplified by the current political landscape.  While it is uncertain if Washington can advance on tax reform, infrastructure spending, and health care, deregulation is high on Trump’s agenda and something that he is advancing whenever possible.  Goldman sees deregulation in industries (for example banking and energy) as reducing costs and increasing efficiencies, allowing companies to spend more on hiring and capital improvements which could help economic growth.

While Goldman Sachs does not see the risk of recession on the short-term time horizon, risks remain.  Volatility has been extremely low and Goldman is expecting a potential market pullback before year end.  This is something we have been discussing with, and preparing clients for.  Despite the possibility of short term volatility, Goldman does have a positive outlook for the market.

The bottom line for us is this – we continue to believe that equities will outperform fixed income and are better for the long-term investor (within their risk tolerance).  Within fixed income, we continue to prefer credit (such as floating rate and high yield over government bonds).  On the equity side, we continue to favor emerging markets and developed international markets, and we prefer to overweight international equities over to domestic equities for the long-term investor.