Goldman says bear market could stick

by Julien Ponthus and Sagarika Jaisinghani

Warnings from Wall Street strategists are piling up on the dour outlook for stocks amid President Donald Trump’s trade war.

BlackRock Inc. strategists Jean Boivin and Wei Li downgraded US equities on Monday to neutral from overweight on a three-month horizon, saying they expect “more pressure on risk assets in the near term given the major escalation in global trade tensions.”

Meanwhile, a strategy team at Goldman Sachs Group Inc., including Peter Oppenheimer and Lilia Peytavin, said the equity selloff could well turn into a longer-lasting cyclical bear market as recession risks mount. 

Several international equity benchmarks have sustained losses that technically meet the definition of a bear market. This includes the S&P 500 Index, which briefly sank 20% below the record high set less than two months ago.

Cyclical bear markets typically last about two years and take five years to rebound to their starting point. Unlike one-off event-driven shocks, they are a function of the economic cycle, the Goldman strategists said.

For now, they view the selloff as an event-driven bear market. Stocks tend to suffer average declines of 30% in both kinds of bear markets, but “differ in terms of duration with event-driven downturns being shorter with a faster recovery profile,” they said.

Goldman economists have raised the probability of a US recession to 45%, and the bank’s strategy team has joined several other Wall Street forecasters in cutting their targets for the S&P 500.

BlackRock Chief Executive Officer Larry Fink has said most CEOs he talks to think the US is already in a recession. Meanwhile, traders have aggressively increased bets that the Federal Reserve will slash interest rates amid concerns the US administration’s trade policy could lead to global economic contraction.

Strategists at the research arm of Fink’s firm said they were increasing allocation to short-term US Treasuries that could benefit in a flight to haven assets.

“The full set of international responses and country-specific negotiations with the US will take time, making it hard to have visibility on when and how this will settle,” Boivin and Li wrote. “Major wealth destruction could hurt sentiment and consumer spending.”

Most analysts and investors don’t yet see immediate risks to the global financial system, even though global stock losses have approached $10 trillion over the past three days.

They do however point to signs of strain — such as frozen corporate debt markets and a jump in gauges of default risk — that have piled up as a result of the rapidly darkening economic outlook. 

Copyright Bloomberg News