A Goldman Sachs trader works on the New York Stock Exchange.
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The rapid return of market confidence after a sharp sell-off in global risk assets should be seen as a cause for concern, says head of asset allocation research Goldman Sachs.
Goldman Sachs’ Christian Mueller-Glissmann told CNBC’s “Squawk Box Europe” on Wednesday that investors could view the stock market rout in early August as something akin to a “warning shot.” .
Stocks have come under intense pressure at the start of the month on concerns that the U.S. could slip into recession and the unwinding of popular “carry trades” linked to the yen, sending stocks below record highs. On August 5, the S&P 500 index fell 3%, its largest one-day drop since 2022.
Since then, however, expectations of an imminent rate cut by the Federal Reserve and improving U.S. economic data have sent stocks soaring. Since Aug. 5, the S&P 500 has gained 8%, while the Dow Jones Industrial Average has gained more than 6%.
“Going into this phase, for about a month or two, positioning and sentiment were at the upper end of the range. People were optimistic,” Müller-Glissmann said.
“We’re actually concerned that there’s going to be some correction because at the same time, while you’re bullish, the macro momentum is a little bit weak. In the 1.5 months before that, there was a negative surprise in the U.S. macro economy, and you’re actually We are starting to see macroeconomic surprises turn negative in Europe and China as well,” he added.
“The concern now is how quickly the market returns to previous levels, and we can debate that, but it certainly shows that we’re pretty much back to the same problem we were a month ago.”
‘A huge technological overreaction’
Market participants are currently awaiting the release of a key U.S. inflation report to gain a better understanding of the health of the world’s largest economy. U.S. personal consumption expenditures price data, the Fed’s preferred inflation gauge, is due out on Friday.
This comes after Fed Chairman Powell It said late last week that “the time has come for policy adjustments”, boosting expectations for a rate cut at the central bank’s September 18 meeting. Powell declined to provide a precise description of the timing or magnitude of a rate cut.
Pedestrians walk along Wall Street near the New York Stock Exchange (NYSE) in the United States on Tuesday, August 27, 2024.
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When asked what risk appetite will look like in the coming months, Muller-Glissmann responded: “What happened on and around August 5th was clearly a huge technical overreaction…so it’s a buy.” Enter opportunities.
He said the challenge for market participants now is that stocks and risk assets have “completely reversed” losses and are back to previous levels.
“What I find very interesting is that risk appetite has not returned to previous levels, but what has actually happened is that safe assets – bonds, gold, yen, Swiss franc – have actually It wasn’t sold off.
“I would say the good news is that while the S&P is back to its previous levels, complacency is not. We are no longer in the same extreme bullish mood and positioning.”
What’s next for investors?
“If you think about it, the bond market buffers most of the drawdown. If you look at a 60/40 portfolio, it’s just a blip. I think the maximum drawdown for a balanced portfolio in the U.S. or Europe is 2%. So. , in other words, the bond market balances equity, just as we would like,” Müller-Glissmann said.
“I would say, given that you don’t have as much of a bond cushion right now, tactically you probably need to be a little more careful with your risk portion, especially after this run,” he continued.
“There are different ways to deal with this, either pruning it a little bit…or you can create alternative diversification vehicles, which could be liquid alternatives or option coverage, things like that.”
—CNBC’s Lisa Kailai Han and Brian Evans contributed to this report.
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