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Why Investing in the Longest Bull Market in History is Still a Smart Move
- 2020 Investment Outlook: Goldman Sachs Private Wealth Management released a report titled "Room to Grow," symbolized by a baobab tree to indicate that while expansions do not last forever, the current bull market and economic growth have further room to extend through 2020.
- Market Duration Thesis: Expansions in developed economies have historically become longer due to improved central bank policies and social safety nets; this trend supports the recommendation for clients to remain invested.
- Positive Return Probability: In an economic expansion, the probability of achieving a positive return is 87%, suggesting the economic backdrop favors staying invested even without specific views on valuation or earnings growth.
- Recession Timing Data: Historical data indicates that price returns on the S&P 500 are attractive (8% to 9% over six months) if a recession is 18 months or more away.
- Recession Probability Estimate: The firm estimates the probability of a recession at approximately 20% to 25%, driven by a stable economic environment and specific historical precedents.
- Fed Policy Impact: Aggressive Federal Reserve tightening is a primary driver of past recessions; with the Fed currently on hold and having paused cycles, the firm expects the current expansion to extend.
- Economic Imbalance Assessment: Using an "excess monitor" heat map, Goldman Sachs identifies the U.S. economy as balanced with below-average imbalances in housing, commercial real estate, equity valuations, and system leverage.
- Household and Corporate Health: U.S. households and financial companies have significantly deleveraged and maintain high savings rates, reducing vulnerability to external shocks.
- Geopolitical Risk Factors: Significant unanticipated risks include geopolitical tensions with China (projected as a long-term issue), potential escalation in the Middle East, North Korean actions, cyber attacks, and terrorism.
- Inflation Outlook: The firm maintains a "disinflationary" view for the decade, citing cheap Chinese labor/goods export and a lack of wage inflation responsiveness despite low unemployment rates.
- Coronavirus Impact Analysis: Historical comparisons to SARS and the Spanish Flu suggest the current virus has a lower mortality rate (estimated 2-3% vs. 10% for SARS) and lower transmission; while short-term volatility is expected, underlying economic trends are predicted to reassert themselves after a couple of months.
- Sector Winners and Losers: The pharmaceutical sector is expected to benefit, while the energy sector, commodities (oil, copper), Chinese equities, and U.S. companies with high exposure to China face negative impacts.
- U.S. Preeminence Theme: The gap between the U.S. and other economies has widened on demographics, labor productivity, export competitiveness, natural resources per capita, and earnings growth; consequently, the firm recommends strategic overweight to U.S. equities and underweight to developed and emerging market equities.
- Election Year Returns: Returns during the third and fourth years of a president's first term are historically attractive with low volatility, whereas the fourth year of a second term historically shows poor returns.
- Volatility Drivers: Election volatility correlates with predictability; the firm notes current volatility levels are hard to forecast as the Democratic candidate is not yet selected.
- Tax Liability Barrier: The firm advises against selling assets to wait for a pullback because high capital gains taxes (especially in high-tax states like New York or California) require a market decline of approximately 29% for a long-term holder to break even after taxes.
- Portfolio Strategy: Clients are urged to base decisions on steady fundamental factors rather than reacting to unsteady geopolitical undertows or exogenous shocks.