- Sharmin Mossavar-Rahmani, chief investment officer of Goldman Sachs’ Private Wealth Management Division, makes a compelling case for the decade-plus bull market in stocks to keep rolling.
- She leans on hard data, historical anecdotes, and low recession probabilities to bolster her thesis.
- Mossavar-Rahmani says “the economic backdrop suggests staying invested.”
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2019 was a year fraught with recession risk. But if you were stoic enough to weather a yield curve inversion, mercurial trade talks, and weakening PMI’s, your portfolio was rewarded with a 29% return.
And if you’ve owned exposure to the S&P 500 since the market’s post-financial crisis bottom in March 2009, you’ve earned a hefty 400% as the bull market has extended well into an 11th year.
Sharmin Mossavar-Rahmani, chief investment officer of Goldman Sachs‘ Private Wealth Management Division, thinks the good times will keep rolling.
“Both the economy has further room to grow, as well as this bull market,” she said on the “Exchanges at Goldman Sachs” podcast. “This will not last forever, but for 2020 our expectation is that it’s going to continue to grow.”
Mossavar-Rahmani roots her thesis in hard data, historical anecdotes, and a low probability of a recession in 2020.
Often times, bearish investors will note a lack of earnings growth and an overvalued market as reasons to head for the hills, but Mossavar-Rahmani thinks this logic is unfounded.
“Even in the absence of a view of valuation or on earnings growth, the economic backdrop suggests staying invested,” she said. “If one is in an expansion, the probability of a positive return is 87%.”
The chart below depicts the probability of positive one-year market returns during economic expansions.
Goldman Sachs, Investment Strategy Group, Bloomberg.
What’s more, Mossavar-Rahmani says that market performance preceding recessions is overwhelmingly positive.
The chart below shows the performance of the S&P 500 up to 3 years before the onset of a recession.
Goldman Sachs, Investment Strategy Group, Bloomberg, NBER.
“The message again here is that there’s a lot upside left if we are still a ways away from a recession,” she said. “And the probability of a recession in our view is actually quite low. We’re about 20% to 25% probability.”
But that’s not all.
Mossavar-Rahmani notes that three historical drivers of economic downturns — the Federal Reserve, economic imbalances, and exogenous shocks — are not cause for concern.
Let’s take a closer look.
1. The Fed
“So an environment where the Fed is on hold and they have paused — that has usually extended the life of expansions,” Mossavar-Rahmani said. “And since we believe that history is a useful guide, our view is that their pause is going to extend the life of this expansion.”
2. Imbalances
“The second cause of recessions has been significant imbalances in the economy,” she said. “The economy is actually particularly balanced.”
The chart below shows Goldman Sachs’ financial excess monitor. Its purpose is to quantify imbalances in markets and represent them visually.
Investment Strategy Group, Goldman Sachs Global Investment Research.
“That heat map shows us that we are actually below-average in terms of imbalances,” Mossavar-Rahmani said. “So when you’re looking at these imbalances, we don’t see any that would cause the US economy to be very vulnerable to any external shock. So it’s on a very solid footing.”
3. Exogenous shocks
“The third cause of a recession, historically, has been a exogenous shock — and those are things we can’t predict by definition, otherwise they wouldn’t be called ‘shocks’,” Mossavar-Rahmani said.
She concluded: “Our recommendation to our clients is you need to invest based on what we call ‘the steady fundamental factors,’ not based on the unsteady undertow of geopolitical issues or the possibility of exogenous shocks.”
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