… on Monday morning, Goldman cross-asset strategist Ian Wright cautions in his latest Kickstart letter that the S&P is now rapidly closing in on the longest period in history without a 5% correction, and that as of today, only 4 times in history has more time passed without a 5% correction. The warning follows similar caution from Goldman’s chief equity strategist David Kostin who as discussed yesterday, has a very bleak outlook for US stocks, and expects the S&P to slid to 2,400 by the end of the year, remain unchanged through the end of 2018 and rise just 100 points by the end of 2019.
As Wright points out today in a note titled “How much further?” in which he reminds the firm’s clients that just last week it reiterated its 12-month OW equities position in our asset allocation, “our sense is that most clients are in agreement, being “reluctantly long” equity given absolute returns are likely to be lower in the future relative to the recent past, but on a relative basis the asset class still appears the most attractive.”
And yet, just like Kostin yesterday, Wright says that given this positioning and the good level of current growth leading to concerns about it potentially slowing, “increasingly the most common question we receive is “when will the market crack?” He goes on to show that based purely on the length and resilience of the current bull market this question makes sense, particularly now – the S&P 500 is currently in the fifth longest streak in history without a 5% correction, and should the pattern continue it will become the longest streak ever by mid-December.
That said, Goldman – tactically long equities – is not suggesting a crash is imminent, and caveats that “low volatility rallies can last a long time, and that valuations can be a poor signal for returns and drawdowns in the near-term.”
In our view, these dynamics are again at play currently, with any vol being sold on spikes and dips being bought quickly, as the current low vol regime appears intact.
So in light of all the evidence of an imminent correction, what is Goldman’s advice to clients? Why, do nothing of course.
Our US equity strategists recently argued against an imminent correction, and our global equity strategist sees low risk of a bear market starting. And while most of the recent central bank meetings (ECB, BoE, Fed) all pointed to tightening policy, we think risky assets should be able to digest higher yields as long as the growth backdrop remains supportive, which we expect.
This, despite two weeks ago laying out no less than 7 reasons why Goldman’s clients just can’t wait to get out.
- History. Many investors argue the bull market is “long in the tooth” and will soon come to an end.
- Volatility (or lack thereof). Realized 3-month vol is nearly the lowest in 50 years. Implied vol as measured by the VIX stands at 12, a 6th percentile event since 1990.
- Valuation. Equity valuations are stretched on almost every metric. The typical stock trades at the 98th percentile and the overall index at the 87th percentile relative to the past 40 years
- Economics. The current US economic expansion just celebrated its 8th birthday making it one of the longest stretches without a recession
- Fed policy. The FOMC has lifted the funds rate by 100 bp since it started tightening in December 2015. During prior hiking cycles, equity P/E multiples typically fell but multiples have actually expanded during the past two years.
- Interest rates. Two months ago, Treasury yields equaled 2.4%, ten-year implied inflation was 1.7%, and the S&P 500 stood at 2410.
- Politics. President Trump’s fluid positions on domestic policy disputes in Washington, D.C. and geopolitical gamesmanship with Pyongyang and Beijing make political forecasting a precarious activity.
Meanwhile, the market is now well over 300 days without a 5% correction and counting…
The SPDR S&P 500 ETF Trust (SPY) fell $0.26 (-0.1%) in premarket trading Monday. Year-to-date, SPY has gained 12.50%.
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