The fall in stocks markets last week might as well just be a small blip in the larger bull run that equities across the globe are witnessing.
The fall in stocks markets last week might as well just be a small blip in the larger bull run that equities across the globe are witnessing. Analysts at global brokerage and research firm, Goldman Sachs have tried to make a case for the bull market to sustain. With enough liquidity available across the world with central banks turning accommodative and equities available at attractive valuations, the bulls could still have a long way to go. Goldman Sachs chalks out 10 reasons why it believes that bulls still have a long way to go.
According to the report, stock markets are currently under the ‘hope phase’ which usually begins in a recession as investors start to anticipate a recovery. “We think that the extraordinary returns of 2019 were consistent with the classic Optimism phase that you tend to see at the end of a prolonged bull market, with most of the gains coming from rising valuations,” the note said. Ending the hope phase, it adds that markets are likely to enter the growth phase now. “It would not be unusual for the market to experience a near-term setback if the animal spirits unleashed in the Hope phase prove to have been too optimistic,” Goldman Sachs said.
Another reason for the optimism around a bull market stems from the possibility of a vaccine becoming more realistic. Analys are expecting a boost with the vaccine coming into circulation and believe that the aggressive policy support would not change, allowing equities to rise further. With the economic recovery expected to arrive sooner with the vaccine, an upward revision of earning could also follow. The note added that the bear market that disrupted the stock markets earlier this year was event triggered, where recovery is faster than other forms of bear markets.
The bear market indicator of Goldman Sachs, based on 6 variables including valuation, yield curve, growth momentum, inflation, private-sector balance and unemployment is pointing to low risks of another bear market. “While these high valuations (the main factor preventing the indicator from falling further and in the 93rd percentile) could limit long-term returns for investors, it is more likely than not that this cycle is only in its early stages and has plenty of time to run,” the note said. Drawing lessons from history, the note pointed out that unconventional policy easing at the time of the financial crisis helped the US and the UK. Similarly, the policy easing seen across major economies could reduce tail-risks.
With the inflation remaining high, Goldman Sachs said that stock markets could prove to be an effective hedge against unexpected price increases. Additionally, stocks still remain better placed. Goldman Sachs in the note also pointed out that even if equities were to fall the technology companies that have benefitted from the recent push to go digital would offer safer havens. “Given that many of these companies generate a great deal of cash and have strong balance sheets, they are also seen as relatively defensive and might continue to outperform even in a market correction,” the note added.