over 3 years ago • 2 mins
While stocks may be in for a bumpy ride in the short term, Goldman Sachs has just published a hefty report detailing 10 (ten!) reasons why it believes the bull market that began in March will continue.
Let’s count the ways that Goldman loves stocks.
One: hope. The investment bank breaks down market cycles to four phases: hope, growth, optimism and despair. It thinks that all four phases played out from 2009 to early 2020, and – since March – we’ve been in the hope phase of a new cycle. This phase “usually begins in a recession as investors start to anticipate a recovery” and “is typically the strongest part of the cycle.”
Two: COVID relief. They reckon a coronavirus vaccine is likely to be approved and widely distributed by the first quarter of 2021, boosting the economy.
Three: the economy, stupid. Goldman’s economists are more optimistic about the economic outlook, and this will feed through to analysts’ forecasts for company profits.
Four: data. A Bear Market Indicator developed by the bank – which incorporates stock market valuations, the difference between short and long term Treasury bond yields, economic growth, inflation, and unemployment – shows “relatively low risks of a bear market despite very high valuations.”
Five: backup. Support for markets from both central banks and government spending.
Six: valuations. Stocks still look cheap compared to bonds.
Seven: interest rates. Shares’ valuations should benefit if the economy can recover while interest rates remain below the rate of inflation – as they are currently.
Eight: limited inflation protection. Should inflation take off, stocks would suffer less than bonds. “As inflation accelerates so, at least, should nominal sales,” Goldman says.
Nine: dividends. Companies – particularly in Europe – are paying more to equity investors via dividends than they are to debt investors, which makes “equities look cheap relative to corporate debt.”
Ten: technology. Tech stocks should continue to do well as the “digital revolution” gathers pace. This could be particularly helpful to markets in the US and China, which have a high weighting of internet stocks.
If Goldman Sachs is correct, the future for stock markets looks relatively rosy. But the bank issued a warning with their prediction: “markets are vulnerable to a correction in the near term, particularly if the strong economic rebound that the market has already priced starts to lose momentum.” In addition, the lack of room for further declines in interest rates will probably lead to lower returns than in previous bull markets.
So now you have 10 reasons to be bullish. Although, naturally, the market bears out there wouldn't struggle too hard to come up with 10 reasons why stocks make a bad investment right now...
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