After the vicious United States stock market sell-off witnessed over the last week, global financial services conglomerate Goldman Sachs says that the fears of a looming crisis are overblown, and it’s just an overdue correction. “What we have seen in the US is typical late cycle behaviour, we are getting some normalisation in volatility, one might argue that it needed to happen, and that its a good thing,” Kathryn Koch, head of client portfolio management and business strategy for Goldman Sachs told ET Now. In its latest report, Goldman Sachs equity strategists have reiterated their year-end stock target and said the sell-off is technical in nature and driven by investor positioning rather than fundamentals. The analysts of the firm have left their forecasts for the S&P to rise to 3,000 in 2019 and 3,100 by year-end 2020 unchanged. We take a closer look at what Goldman Sachs has to say about the global stock market rout.
Sell-off caused by concerns over Fed Monetary Policy stance
While the current inflation rate doesn’t cause too much worry at 1.7% in the United States, the investors are concerned about a possible hawkish Monetary Policy stance by the US Federal Reserve to curb rising inflationary pressures especially after a report released by Labor Department in the United states said that wages have shot up in the recent times. “The markets are jittery that there’s going to be rate rise. And why is there a rate rise? Because growth is good in the US, and with growth comes inflation and with inflation, the central bank needs to act and raise rates,” Kathryn Koch of Goldman Sachs told ET Now. According to a US Labour Department report released recently, private-sector wages and salaries in the United States rose by 2.8 percent in the final three months of 2017 compared with a year earlier, the fastest growth since the recession.
Not a bear market or replay of market crash
According to the global firm, the ongoing sell-off is not the beginning of any major bear market or a repeat of earlier financial crisis, as corporate earnings are on the path of strong recovery on the back of accelerating GDP growth, rising commodity prices, and a weaker than expected U.S. dollar. “This is a correction and not a start of a major bear market,” Katie Koch points out. Further, the firm says that expansion of valuations should be limited due to rising interest rates and a historically expensive market, even with the sell-off.
Pullback was overdue
According to Goldman Sachs, pullback in the indices was overdue. “History suggested the S&P 500 was overdue for a pullback: 404 trading days had elapsed since the market last experienced a 5 percent drawdown, the longest stretch of time in nearly 90 years! Since 1929, pullbacks of 5 percent have occurred after 92 days, on average,” the firm said in its recent report. On similar lines, JP Morgan had termed the sell-ff as a correction. “The sell-off in global equities and sovereign debt that started late last week and continued into Asia trading on Monday is more likely an overdue correction than a response to fears of inflation,” JP Morgan said in its report.