Goldman Sachs Asset Allocation Research Director warns: Market confidence is recovering too quickly!

Goldman Sachs Asset Allocation Research Director Christian Mueller-Glissmann recently stated that after a significant sell-off in global risk assets, market confidence quickly recovered, which should be seen as a worrying issue. Investors can view the stock market plunge in early August as a "warning".

In early August, concerns about a possible recession in the U.S. economy and the unwinding of the yen "carry trade" led to a sharp decline in U.S. stocks. The S&P 500 index plummeted by 3% on August 5th, marking the largest single-day drop since 2022. However, benefiting from expectations of an imminent rate cut by the Federal Reserve and improvements in several U.S. economic data, U.S. stocks rebounded significantly. The S&P 500 index rebounded by over 10% from its low point on August 5th in Monday's trading session, while the Dow hit a new all-time high.

Regarding the market's intense reaction, Mueller-Glissmann stated that the events around August 5th were clearly a massive technical overreaction, making it a buying opportunity. Subsequently, entering a phase of a major rebound, there was a period of one or two months where positions and sentiment were at the upper limit, with people being bullish.

However, Mueller-Glissmann warned that the current macroeconomic momentum is slightly weak. Prior to this, there had been about a month and a half of negative surprises in the U.S. macroeconomy, and in fact, economic surprises in regions like Europe had also turned negative. "We are actually concerned that there will be some adjustments. Although you hold long positions, the macroeconomic momentum is slightly weak."

Mueller-Glissmann believes that the worrying aspect now is how quickly the market has returned to previous levels. The challenge facing market participants currently is that the stock market and risk assets have completely reversed previous losses and returned to previous levels. This certainly indicates that we are almost back to the problem we had a month ago.

When asked how risk appetite will develop in the coming months, Mueller-Glissmann mentioned an interesting phenomenon he observed: risk appetite has not returned to previous levels. He pointed out that what actually happened was that safe assets—bonds, gold, the yen, the Swiss franc, etc., were not being sold off. "What I want to say is, the good news is that although the S&P 500 index has returned to our previous levels, there is no complacency. We are no longer in the same extreme bullish sentiment and positioning."

What should investors do next? Mueller-Glissmann had previously advocated for a 60/40 investment portfolio, and he now points out that in a turbulent month in the market, a balanced investment portfolio performed exceptionally well:

If you think about it carefully, the bond market cushioned most of the decline. If you look at a 60/40 investment portfolio, you will find that this was a flash in the pan. The maximum drawdown for a U.S. or European balanced investment portfolio was 2%. So, in other words, the bond market balanced the stock market, as we hoped.

However, he also warned that the recent cushion provided by the bond market may not be as reliable in the short term:

I would say, considering that you currently do not have as much cushion from bonds, tactically speaking, you may need to be slightly more cautious with your risk asset portion, especially after experiencing this rally There are different ways to solve this problem. Either you slightly reduce the amount of risk assets, or you can create alternative diversified products, which can be liquidity substitutes or covered with options, and so on