After witnessing the S&P 500 surge 30% in 2013, and return 200% since the market trough in March 2009, investors are wondering what they should do next.
A man walks from his Ferrari as a carriage passes during the fourth day of the Royal Ascot horse racing festival at Ascot, southern England, June 21, 2013.
Goldman Sachs’ Sharmin Mossavar-Rahmani and Brett Nelson are recommending that the firm’s private wealth clients should “stay fully invested at their strategic allocation to U.S. equities.”
Goldman’s Private Wealth Investment Management division will manage money for folks with at least $10 million.
While this recommendation is the same as recommendations they made in Dec. 2008, Apr. 2012, and Apr. 2013, Goldman says their current view is a more “nuanced” this time because valuations aren’t the tailwind they once were.
“We believe that having a long-term investment horizon is particularly important at this time because it gives our clients a comparative advantage over other investors whose investment horizons are hampered by institutional constraints such as quarterly reporting periods or public finance considerations,” Mossavar-Rahmani and Nelson write.
“In addition, the current monetary policy environment of zero interest rates makes cash and high-quality fixed income assets much less attractive over the next one and five years, which, in turn, increases the attractiveness of equities.”
They point out that the “the penalty of being wrong when underweighting US equities are very high.”
Another factor in this recommendation is that bull markets “do not die of old age.” Instead, they need some shock to trigger a bear market. In the past, these triggers have been tighter monetary policy or an external shock like the dot com bubble or housing bust and there seem to be no signs of any such triggers at the moment.
Of course, there are a few key things that pose a risk to U.S. equity markets: 1. The U.S. economy stalls and goes into recession; 2. The Fed’s exit from quantitative easing is more disruptive than anticipated; 3. The eurozone sovereign debt crisis bubbles over; 4. Confidence in Japan’s three arrows of Abenomics wanes; 5. Emerging market countries see a hard landing; 6. There are geopolitical disruptions through military engagement.
Meanwhile, here are Goldman’s key investment themes for 2014:
- Underweight investment grade bonds, including intermediate municipal bonds and 10-year Treasuries, because they are expected to have slightly negative total returns for 2014 and modest positive returns over the next five years.
- Overweight high-yield bonds and bank loans as they are expected to outpeform investment grade bonds and cash in the near term and over next five years.
- Maintain exposure to hedge funds as they should have mid-single-digit returns and should outperform bonds.
- Stay fully invested in U.S. equities will have modest single-digit returns of about 3% in 2014 and slightly higher returns over the next five years.
- Overweight Euro Stoxx 50 because they “will continue to have some of the most attractive near-term and long-term returns.”
- “US banks will have more subdued returns than last year but will still be quite attractive in absolute terms.”
- “Emerging market equities are likely to provide higher returns than investment-grade bonds and US equities, but we expect emerging market bonds to lag US high-yield bonds and bank loans.”
Overall, Goldman is more cautious now, and is proceeding with “extra vigilance, knowing that the summit is in sight.”