Markets will move into a “hopeful” phase next year and investors would do well not to miss it, says Goldman Sachs

Fresh COVID-19 worries in China threaten to undo any pre-holiday gains for Wall Street, with stock futures in the red and the dollar higher ahead of Monday’s open.

In a shortened week that will bring both Thanksgiving and the World Cup kickoff, investors have all sorts of excuses to step on the sidelines. Those who stick around will rummage through Wednesday’s traditional data dump and even an appearance by Fed Chairman Jerome Powell.

There is more caution on ours call of the daywhere Goldman Sachs’ outlook for 2023 calls for a “volatile” run to the bottom of this bear market, before a more optimistic phase takes hold in 2023. And investors will need to time this one right.

“We expect markets to move into a ‘hopeful’ phase of the next bull market at some point in 2023, but from a lower level,” a team led by Goldman’s chief global strategist Peter Oppenheimer said in a note to the investors. customers. “The initial rebound from the trough is likely to be strong, in common with the start of most cycles before moving into a ‘Postmodern Cycle’ of lower yields.”

But before investors can get to the hopeful stage, they need to weather the rest of this bear market which Oppenheimer and team say still has a long way to go.

They are concerned about the recent renewed optimism about slowing interest rate hikes that has led to stocks surging about 5% since June, even with US real interest rates up 85 basis points and yields at 10 years BX:TMUBMUSD10Y
more than 50 basis points higher since then.

“The recent rebound in equities isn’t the first we’ve seen in this bear market. In our view, the speed of interest rate hikes (rather than their absolute level) has the potential to cause more damage as investors are likely to increasingly focus on earnings growth and weakness,” Oppenheimer said. and the team.

For this reason, they expect overall returns to be relatively low between now and the end of 2023 when they see the S&P 500 SPX
finishing around 4,000. Right now, we’re stuck in a “cyclical” bear market that typically sees declines of about 30 percent lasting 26 months, with 50 months needed to recover, the bank said.

Through the 2023 budget, they see the conditions for a recovery starting to take shape. And this suggests that from a lower level, the prospects for a transition to a “hopeful” phase of the next cycle will be strong. Be very careful here, say Oppenheimer and co: “These rallies typically begin during recessions and are driven primarily by valuation expansion and can be expensive to lose.”

Goldman Sachs

Capturing the “hope” phase right is really tricky. Their chart above shows how overall average returns over the next 12 months are much higher if an investor waits a month until after the low instead of investing a month early.

Even during that stage, initial recovery trends tend to be driven by assets that underperformed the most during the bear market. “That’s what makes these transitions so difficult to navigate. Recovery when it comes tends to be swift and driven by the types of companies investors tend to avoid during bear markets.”

“That said, this is ‘trade after trade’ and we think it’s premature to position for that now,” Goldman said, urging investors to hold their horses.

As for now, strategists are all in agreement on a “balance wheel approach,” which means investing across the risk spectrum with the aim of achieving a more uniform portfolio. Their mix is ​​made up of quality companies, with strong balance sheets and stable margins, with high value, energy and resources where valuation risks remain limited.

“We like companies that can grow earnings and returns through a combination of reinvestment and dividends over time,” he said, adding that, unlike last cycle, they want more diversification across styles and regions and more emphasis on valuation, which expected to “improve yields through 2023.”

The markets

Market Watch

ES00 stock futures


are under pressure, with bond yields TY00

pushing north, CL oil prices
softer, and the DXY dollar
earning. Asian stocks were mixed with Hong Kong’s Hang Seng HK:HSI
down 2%.

The buzz

In a surprise move, Walt Disney DIS
is bringing back its former CEO Bob Iger to replace Bob Chapek after a string of lost quarters. Stocks are on the rise.

China is tightening COVID-19 curbs after Beijing recorded three COVID-19 deaths over the weekend, the first in six months. Chinese consumer staples and entertainment stocks bore the brunt of the losses.

Dell PC Manufacturers DELL
and HP HPQ,
video conferencing platform Zoom ZM
and Best Buy electronics chain BBY
will report this week and may offer a glimpse into how PC failure is unfolding. DLTR dollar tree
and Deere DE
will also report.

San Francisco Fed Chairman Mary Daly will speak on inflation later on Monday. Wednesday we’ll get durable goods orders, weekly jobless claims, flash manufacturing and services PMI data, University of Michigan Consumer Sentiment Index, including 5-year inflation expectations, new home sales, president’s remarks Fed Secretary Jerome Powell and minutes of the last Fed meeting.

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Iran is now arresting actors who take off their veils in protest

Meet the migrant workers who made the World Cup possible

The graph

More on China and its battle against COVID-19:

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