Stock mkt still in a bear phase; see bumpy road to recovery: Goldman Sachs

One of the three key reasons why a genuine bear market trough has not yet been reached, according to them, includes their belief that inflation and interest rates still have more room to rise

Global stock markets have not seen a trough yet and are still in a bear phase, cautioned analysts at Goldman Sachs in a recent note, who expect a bumpy road to recovery till the worst is over. The three key reasons why a genuine bear market trough has not yet been reached, according to them, includes their belief that inflation and interest rates still have more room to rise; economic growth is likely to weaken and valuations and positioning are not at extremes.

"Our fundamentals-based Bull/Bear Indicator (GSBLBR) and our sentiment-based Risk Appetite Indicator (GSRAII) help identify potential inflection points. Combining these can provide powerful signals when they are both close to extremes. We have not yet met these conditions," wrote Peter Oppenheimer, chief global equity strategist and head of macro research in Europe at Goldman Sachs in a recent coauthored note.

The initial transition from a bear market to a bull market, Goldman Sachs said, tends to be strong and driven by valuation expansion, irrespective of the type of bear market. Since bear market rallies are common, they make these transitions difficult to spot in real time.

Since June, most global markets have staged a smart recovery amid hope that the global central banks may go slow on rate hikes as fear of galloping inflation dimmed. This was mostly on account of a cool-off in commodity prices, especially crude oil that has lost nearly 21 per cent (Brent) since then to around $89 a barrel now.

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Leading market indexes such as the NASDAQ, S&P 500, Nikkei 225 and the S&P BSE Sensex have rallied up to 13 per cent since June 2022 till date, data shows. This up move, Goldman Sachs said, was largely a reflection of growing confidence that inflation is reaching a peak and that the peak in the interest rate cycle (or the ‘Fed pivot’) is closer at hand than previously feared.

"In this context the recent rally since June 2022 is, in our view, a bear market rally. Its duration and magnitude were not unusual relative to the experience of previous decades. We expect further weakness and bumpy markets before a decisive trough is established. We expect the next bull market – what we call the Post-Modern Cycle – to be ‘Fatter & Flatter’ than the last, with some distinct secular drivers," Oppenheimer wrote.

On average, bear markets, according to the note, last 44 days and the MSCI AC World return is 10 per cent to 15 per cent. Cyclicals, Oppenheimer said, outperform Defensives 83 per cent of the time and by 4 per cent on average.

"We find a similar result at the regional level; emerging markets outperforms developed markets 67 per cent of the time. During these periods there is no clear pattern in the performance of value versus growth, or small versus large-caps," he said.

At a macro level, Goldman Sachs believes that though inflation may be close to a peak, it may stay elevated for some time, putting upward pressure on rates relative to current market pricing.

"Our economists argue that there is a narrow path to a soft landing that requires policymakers to slow GDP growth to a below-potential pace in order to re-balance supply and demand in the labour market enough to bring down wage growth and, ultimately, inflation. While recessions could still be relatively shallow compared with many in the past, there is still a greater than even chance that investors will price more recessionary risk as interest rates continue to rise. Markets are likely to price a combination of higher terminal rates and greater recessionary risk before a genuine bull market inflection is likely to be reached," Oppenheimer said.