Correction in equities would be a buying opportunity, Goldman says
Bank's strategists cite signs that markets are headed for a drop of 10% to 20% in coming months.
Goldman Sachs Group Inc. predicts a correction in global stocks is on the horizon, but says any such pullback would be a buying opportunity.
Strategists at the U.S. bank say signals are flashing for a drop of 10% to 20% in equity prices in the coming months. Goldman’s risk appetite gauge is hovering near a record high, indicating a sharp rise in investor optimism, while traders seem complacent about political risks like Italy’s national elections, they say. Still, the risk of a full-blown bear market is viewed as low, as strong and synchronized global growth provides a reason to stay bullish.
“We do not believe that this would be prolonged or morph into a bear market,” strategists including Peter Oppenheimer wrote in a note on Monday. “Historically, there are many examples of corrections that are short-lived and do not turn into more drawn-out bear markets that are typically associated with economic weakness.”
Goldman, which remains overweight global equities, defines a bear market as a drop of 20% or more.
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The amount of value added to U.S. equities in January is poised to exceed any month on record, data compiled by Bloomberg show, while the MSCI All-Country World Index is trading near an all-time high, buoyed by optimism over growth and corporate profits. While the recent strength of global stocks does not mean they must enter a correction phase, it suggests one is overdue, Goldman says.
“Rising valuations, amid increased optimism, make the market more vulnerable to a setback even if the underlying trend remains intact,” the strategists wrote.
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