Goldman Sachs Strategists See U.S. Bull Market in Last Inningsby
Outlook sees single-digit gains for diverse portfolios in 2016
Strategists say China has tools to prevent hard landing
U.S. stocks are nearing the end of a long bull market, according to investment strategists at Goldman Sachs Group Inc. who cater to the bank’s wealthy individual clients.
"We expect a few more innings and are cautiously optimistic," according to the 2016 outlook report by the bank’s private wealth management unit. "We expect modest single-digit returns for a moderate-risk, well-diversified portfolio given current equity valuations and the level of interest rates."
Steady growth expected in the economy and corporate earnings means clients shouldn’t reduce their allocation to U.S. equities, according to "The Last Innings," which was released today and co-authored by Sharmin Mossavar-Rahmani, chief investment officer for the bank’s investment strategy group, and Brett Nelson, head of tactical asset allocation for the unit.
The Standard & Poor’s 500 Index had one of its worst starts to a year last week after returning more than 200 percent from its low in March 2009 through the end of last year. Volatility in Chinese markets spurred a global selloff in riskier assets as geopolitical tensions increased in other regions and investors started to absorb the Federal Reserve’s first interest rate hike in almost a decade.
China probably won’t have a "hard landing" in 2016 as it shifts to a more consumption-driven economy because its leaders have monetary and fiscal tools to prevent it, the annual report said.
"The risks emanating from China are longer term and are more likely to unfold over the next five years," the report said. "The biggest risk to China’s growth in 2016 is a greater-than-expected slowdown in real estate."
Hedge Fund Returns
The report also outlines the strategists’ views on hedge funds and high-yield bonds, both of which struggled last year.
The strategists had expected hedge funds to return 4 percent to 5 percent on average in their past three annual reports. They have a similar return expectation for hedge funds in 2016 and over the next five years, the report said. The average hedge fund declined 0.85 percent in 2015, according to data provider Hedge Fund Research Inc.
The strategists recommend clients have a position in high-yield bonds this year in part because they see oil prices stabilizing at $40 to $60 per barrel toward the end of 2016.
"We think high-yield fixed income offers a very attractive risk/reward profile, both in the short term and over a longer horizon," the report said.
From June 2014 through the end of last year, investors pulled about $90 billion out of high-yield mutual funds, including floating-rate bank loan funds, according to data from the Investment Company Institute.
The strategists say a range of risks could alter their predictions, including the escalation of geopolitical tensions and terrorism, a cyber attack or if the pace of the Federal Reserve’s tightening is faster than the market anticipates.