Regarding the rapid rebound of the US stock market, Goldman Sachs warns: Market confidence has recovered too quickly
Goldman Sachs warns that the market's confidence recovery is too fast, which could trigger a pullback. Goldman Sachs' head of asset allocation research, Mueller-Glissmann, pointed out that the continued weakness of the U.S. economy and the sell-off of global risk assets have led to concerns about the rapid warming of market sentiment. Despite the S&P 500 index rising 8% since early August, he warns investors to pay attention to the upcoming release of the PCE price index to assess the health of the U.S. economy. Federal Reserve Chairman Powell hinted at rate cuts expectations, but did not specify the timing
According to the financial news outlet Zhitong Finance, Christian Mueller-Glissmann, the head of asset allocation research at Goldman Sachs, stated that the rapid recovery of market confidence after a significant sell-off in global risk assets should be seen as a worrisome issue. Mueller-Glissmann said on Wednesday that investors could consider the stock market plunge in early August as a kind of "warning".
The stock market came under pressure earlier this month due to concerns about a possible economic recession in the United States and the unwinding of carry trades linked to the Japanese yen, dragging the market off record highs. On August 5th, the S&P 500 index fell by 3%, marking the largest single-day decline since 2022. However, since then, expectations of a Fed rate cut and improving US economic data have driven a significant rally in the stock market. Since August 5th, the S&P 500 index has risen by 8%, and the Dow Jones Industrial Average has risen by over 6%.
Mueller-Glissmann explained, "Before this, you might have had one or two months where positions and sentiment were at the high end of the range. People were very optimistic. We were actually worried about some pullback because at the same time, although you had bullish positions, the momentum in the macro economy was a bit weak. About a month and a half before that, there were unexpected negative developments in the US macro economy, and the macro economy in Europe also unexpectedly turned negative. What is worrying now is how quickly the market will return to our previous levels... But what can be certain is that this indicates we are almost back to the problem we had a month ago."
Significant Overreaction
Investors are currently awaiting the release of important inflation reports in the US - the US PCE price index report, in order to better understand the health of the world's largest economy. The US July core PCE price data is scheduled to be released on Friday, which is a favored inflation indicator by the Fed. Fed Chairman Powell said late last week that "the time for policy adjustment has come," enhancing expectations of a rate cut at the September 18 meeting. Powell refused to disclose the specific timing and magnitude of the rate cut.
When asked about the future risk appetite in the coming months, Mueller-Glissmann replied, "What happened on August 5th and around that time was clearly a significant technical overreaction... So this is a buying opportunity."
He said that the challenge currently faced by market participants is that the losses in the stock market and risk assets have been "completely reversed" back to previous levels. He said, "What I find very interesting is that risk appetite has not returned to previous levels. In fact, safe assets such as bonds, gold, the yen, and the Swiss franc have not actually been sold off. The good news is that although the S&P index has returned to previous levels, there is no complacency. We are not in that extreme bullish sentiment and position."
What should investors do next?
Mueller-Glissmann previously advocated for a 60/40 investment portfolio, noting that the balanced portfolio performed "amazingly" during a month of market turmoil. However, he warned that the recent cushion provided by the bond market may not be as reliable in the short term Mueller-Glissmann explained, "If you think about it carefully, the bond market has cushioned most of the decline. If you look at a 60/40 investment portfolio, it's a flash in the pan. I believe the maximum drawdown for a U.S. or European 60/40 investment portfolio is 2%. So, in other words, the bond market balances the risk of the stock market, as we hope."
He continued, "I would say, if you currently don't have as much cushioning from bonds, tactically speaking, you may want to be cautious with your risk exposure, especially after this rally. There are different ways to address this issue, either by reducing some risk positions... or by creating alternative diversified products - it could be liquidity alternatives, or options overlays, and so on."