Outlook
Half Full
Investment Strategy Group |
January 2017
Investment Management Division
“ Everything we hear is an opinion, not a fact. Everything we see is a perspective…”
Attributed to Marcus Aurelius
This material represents the views of the Investment Strategy Group in the
Investment Management Division of Goldman Sachs. It is not a product of
Goldman Sachs Global Investment Research. The views and opinions expressed
herein may differ from those expressed by other groups of Goldman Sachs.
Sharmin Mossavar-Rahmani
Chief Investment Offcer
Investment Strategy Group
Goldman Sachs
Brett Nelson
Head of Tactical Asset Allocation
Investment Strategy Group
Goldman Sachs
Additional Contributors
from the Investment
Strategy Group:
Matthew Weir
Managing Director
Maziar Minovi
Managing Director
Angel Ubide
Managing Director
Farshid Asl
Managing Director
Matheus Dibo
Vice President
Mary Catherine Rich
Vice PresidentOutlook
Investment Strategy Group
2017 OUTLOOK
Dear Clients,
Readers of our previous
Outlook
publications may recall that this page typically
summarizes the key themes of our economic and fnancial market prospects for the
coming year. However, for 2017 we decided that a brief overview would not suffce,
given the current environment of high market valuations, great policy uncertainty,
signifcant geopolitical tensions and, in all likelihood, an unconventional US
presidency.
Since the trough of the global fnancial crisis, we have consistently emphasized US
preeminence and maintained a strategic overweight to US equities relative to global
market capitalization-weighted benchmarks. Tactically, we have had an overweight
allocation to US equities and US high yield bonds from as early as mid-2008. Even
when US equities became more expensive, we continued to recommend that clients
stay fully invested at their strategic allocations. Indeed, we have reiterated that
recommendation in our past
Outlook
publications, client calls and
Sunday Night
Insight
reports as many as 59 times since January 2010.
But now we have crossed into the 10th decile of valuations: US equities have been
more expensive than current levels only 10% of the time in the post-WWII period.
Yet we continue to recommend staying the course. We are duly aware that this
recommendation is long in the tooth, particularly given such high valuations and the
unusually high level of policy uncertainty.
Policy uncertainty, both economic and political, abounds globally: uncertainty with
respect to Brexit (the how and when), upcoming elections in Germany and France
(the who), transitional government in Italy (the how long followed by what) and new
appointments to the Standing Committee in China and their signifcance (the who and
what of any reform agenda), to name a few.
We are also facing rising geopolitical tensions that could trigger signifcant market
volatility. Tensions in the Middle East will not abate. Greater Russian involvement
in that region is stabilizing in some respects and destabilizing in others. Further
Russian incursions into Eastern Europe may elicit a more robust reaction from the
West. Terrorism could spread in the US and Europe as ISIL (Islamic State of Iraq and
the Levant) loses territory in Iraq and Syria and foreign fghters return home. North
2Goldman Sachsjanuary 2017
Korea’s nuclear program and missile launches go unchecked. There is rising risk of
military incidents—or accidents—in the South China Sea and across the Taiwan Strait.
China is the most likely source of global economic shocks over the next two to
three years. The country’s leadership continues to prioritize imbalanced economic
growth over structural reforms, thereby increasing debt at an unsustainable pace. Such
increases will eventually prove to be destabilizing.
In Donald Trump, the US has elected an unconventional president in many
respects, including his more US-centric approach to China. If China responds to,
say, imposition of US tariffs on imports of Chinese products by sharply devaluing
the renminbi, signifcant downside volatility and tighter global fnancial conditions
will follow.
Given already high US equity valuations, uncertain economic and political policy
prospects and heightened geopolitical risks, readers may well ask why we continue to
recommend staying fully invested in US equities. Among the reasons:
As Professor Jeremy Siegel of the University of Pennsylvania wrote 23 years ago in
Stocks for the Long Run
1 and recently repeated in a
Wall Street Journal
interview,2
“Stocks are the best long-run asset.” We refne that view by saying US equities are
the best long-run asset.
the economy, with looser fscal policy, relatively easy monetary policy and a less
stringent regulatory environment. We expect US growth to continue through 2017.
2017, with looser fscal policy and still easy monetary policy in key countries.
measures with respect to tariffs and trade agreements risk jolting fnancial markets,
as a self-described “deal maker” he will likely adjust and change course as necessary
to achieve his desired results.
We may have a bumpy ride, but the US economy will not be derailed.
Over the years, we have viewed the glass as half-full—if not full—when it comes
to the US economy. Many others have seen the glass as half-empty, pointing out that
productivity growth has decreased, US labor demographics are less favorable and
government policies have been ineffective. While it is correct that productivity growth
has decreased and labor demographics are less favorable, it does not follow that the
US economy is in stagnation. Quite the reverse.
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