What Goldman Sachs is telling high net worth clients about the stock market


Goldman Sachs’ private wealth management advisors are telling its wealthiest clients that stocks are not in a bubble and that the bull market likely continues.

“We recommend that clients stay invested in equities notwithstanding currently high valuations and the constant cascade of warnings that we are in an equity bubble. We also recommend clients maintain a strategic overweight to US assets for the long run, and enhance the returns of their portfolio by taking advantage of tactical opportunities in stocks, bonds, and currencies,” Sharmin Mossavar-Rahmani and Brett Nelson wrote in their 2018 annual outlook, a 108-page report entitled “(Un)Steady as She Goes.”

Goldman’s private wealth management clients generally have investable assets of at least $10 million.

While the market has been on a tear, that’ s not to say that there aren’t risks that could derail its current upward trajectory.

“This recommendation comes with a note of caution,” the analysts said. “We have to remain vigilant, brace ourselves for continued cyberattacks and terrorism, and acknowledge that growing geopolitical tensions could result in an ugly and costly war.”

The bull market, which began in 2009, has some investors and experts concerned about the high valuations.

“At nearly nine years, this bull market is already quite old by historical standards, now less than one year shy of the nearly decade-long advance that culminated with the technology bubble in 2000,” Goldman wrote. “Forever, last year’s gains pushed valuations deeper into the 10th decile, indicating the S&P 500 has been cheaper at least 90% of the time historically. Such elevated valuation in the past have weighed on equity returns over the subsequent five years and lowered the odds of positive outcomes.”

Goldman notes that selling stocks based on expensive valuations has historically been a losing strategy.

“Yet we should not confuse an expensive market with one that is certain to generate a loss, especially over shorter holding periods,” Goldman wrote.

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Selling stocks because valuations are expensive tends to be a losing strategy compared to long-term buy-and-hold investing.

Goldman also argues that bull markets don’t die from old age but from recessions. Presently, there’s a low probability of a U.S. recession, which is one of the key drivers of the market right now.

Goldman Sachs’ model currently places the probability of a recession in the U.S. over the next two years at 17.6%. For 2018, the likelihood is 10%.

“When the probability of a recession is low, the likelihood of positive returns is very high,” Goldman Sachs wrote.