How To Reward Yourself In A Market This Risky

How To Reward Yourself In A Market This Risky
Carl Hazeley

almost 2 years ago2 mins

  • Investors flooded back into stocks last week despite all the signs there’s economic trouble ahead.

  • That could be because investors’ negativity has just bottomed, which is usually followed by a bounceback in riskier assets.

  • So Goldman suggests going long US stocks and commodities to make the most of the opportunity while keeping some cash on hand to protect yourself.

Investors flooded back into stocks last week despite all the signs there’s economic trouble ahead.

That could be because investors’ negativity has just bottomed, which is usually followed by a bounceback in riskier assets.

So Goldman suggests going long US stocks and commodities to make the most of the opportunity while keeping some cash on hand to protect yourself.

Mentioned in story

Investors rushed back into stocks last week, even though they’re arguably riskier than ever: inflation, interest rate hikes, and the Ukraine situation are all threatening to send the global economy and stock markets into reverse. And new analysis from Goldman Sachs agrees that you don’t need to wait till it all blows over: there are ways to profit without taking on unnecessary risk.

Why have risky assets rallied?

On the face of it, the risk-on rally doesn’t make sense. Forward-looking data suggests the global economy is taking a hit, record-high energy prices and inflation mean consumers and companies don’t have as much money to spend, and rising interest rates are making it more expensive to borrow money. These things are unequivocally bad for company earnings and the economy at large.

And yet investors’ appetite for risk – as measured by Goldman Sachs’ own indicators – jumped last week.

GS risk measure chart

Goldman also tracks an “aggregate measure of cross-asset positioning and sentiment”, which has been pretty bearish all year. Two weeks ago, however, the measure bottomed at 30%. And the investment bank has clocked that when that happens, it tends to indicate a balance in favor of risky assets.

GS sentiment chart

Thing is, this measure is no secret, and “fast money” investors – a.k.a. hedge funds – noticed. They quickly reversed some of their most bearish bets, helping push the overall market upward.

What’s the opportunity here?

Goldman is the first to admit that rising stock markets aren’t necessarily incompatible with rising interest rates – especially in the initial stages and when rate hikes aren’t that big or that fast. So it’s not averse to the idea that you can have your cake and eat it too: you can keep one eye on the very real risks that are looming, sure, but you can make the most of the rally while you’re at it.

The investment bank, then, recommends being overweight stocks. It sees US stocks as particularly attractive, not least because their dividend yields offer a buffer against rising interest rates that could yet attract fresh demand from investors.

Dividend vs bond yields

Likewise, commodities are perhaps a sensible bet given the windfall profits energy companies are set to earn on the back of current oil and gas prices. And as for how to manage all the lingering uncertainty, Goldman’s got a fairly simple piece of advice: keep more cash on hand than you otherwise would in case of a dramatic selloff.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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