Strategists do not foresee 'soft landing'
Goldman Sachs Group and BlackRock are becoming more pessimistic about stocks in the near term, arguing that markets have not yet factored in the threat of global recession.
According to a report by Bloomberg, Goldman strategists pointed to rising real yields as a major challenge. That prompted them to cut equities to underweight in the U.S. bank’s global allocation over the next three months, while maintaining an overweight position in cash.
BlackRock, which is tactically underweighting developed-market shares and favoring credit in the short term, is advising investors to "shun most stocks."
“Current levels of equity valuations may not fully reflect related risks and might have to decline further to reach a market trough,” Goldman strategists including Christian Mueller-Glissmann wrote in a note Monday. Goldman’s market-implied recession probability has risen to above 40% following the recent bond sell-off, “which historically has indicated elevated equity drawdown risk,” they wrote.
After central bankers from the US to Europe declared their resolve to fight inflation, sending global stocks into a free fall over the past few days, Morgan Stanley and JPMorgan Asset Management are echoing similar worries.
Even though members of the MSCI World Index have lost more than US$8 trillion in value since their mid-September peak due to a rise in US yields and the dollar, little relief appears to be in the cards.
In a note, BlackRock Investment Institute strategists Jean Boivin and Wei Li said they "don't see a 'soft landing'" where inflation returns to target quickly without stifling activity.
The upshot has been more volatility and pressure on risky assets.
JPMorgan Asset is maintaining its underweight on stocks going into the fourth quarter even as stock market volatility keeps rising.
Sylvia Sheng, a global multi-asset strategist, wrote on Tuesday that the company "strongly" prefers investment-grade credit to high yield, citing expectations of slow growth in the US and recession in Europe over the next 12 months.
Recently, a global recession probability model from Ned Davis Research generated a "severe" recession signal exceeding 98%. The only other times it has been that high, according to the company, were during previous severe downturns, like in 2020 and 2008–2009.
The Goldman strategists wrote that the era of the stock market adage "There Is No Alternative" was over.
Since the global financial crisis, falling yields have enhanced the appeal of stocks, but "investors are now faced with TARA (There Are Reasonable Alternatives) with bonds appearing more attractive," they wrote.
“How much yields have moved up, especially real yields at this point, that was very tough to see, this is what’s making us so uncomfortable,” Mueller-Glissmann said in an interview with Bloomberg TV.
“Because 150 bps we haven’t seen for a very long time, that changes the narrative from TINA to TARA,” he said. “You can go to credit to get your nominal yield with relatively little risk, you can go to the TIPS market to get your real yield with relatively little risk, so your incentive to own equities is lower.”