- Risks of a stock-market correction are growing, but investors shouldn’t jump ship, Goldman Sachs said Tuesday.
- The bank expects tactical risks to eventually give way to a new bull market and steady gains.
- Investors should look through near-term volatility and buy on any correction, the bank’s strategists said.
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The stock market’s continued rebound is facing new pressures, but Goldman Sachs strategists expect any correction to be a prime buying opportunity.
Equities are, so far, closely following the same recovery trend seen after the Global Financial Crisis more than a decade ago, strategists led by Peter Oppenheimer said in a Tuesday note. Prices have quickly bounced back from their recession-induced lows as investors rushed to profit from the broader economy’s rebound.
Yet stocks slid into a correction about one year after bottoming in 2009, and today’s market sentiment suggests investors are underestimating a similar decline. Goldman’s gauge of risk appetites recently moved above 1, a level that has previously preceded slumps.
“The market is rising on good news but choosing to largely ignore weaker data and rising infection rates,” the team said. “Rapid fund flows and highly correlated risk assets make a correction in the near term increasingly likely.”
Another bear market, however, isn’t likely to emerge, according to Goldman. The firm’s Bull/Bear Market Indicator recently fell to more moderate levels and sits below the 70% threshold that the bank views as a “danger zone.” The team views the market as in an early bullish stage and sees near-term risks giving way to steady gains as the global economy stabilizes.
The transition between bear and bull markets is often marked by strong volatility and a brief setback “as investors wait for, or begin to doubt, the recovery that has been priced,” the team said. The trend will drive some froth in the coming months, but investors who can look through tactical risks should “make any correction a buying opportunity,” they added.
Where the financial crisis exposed economic vulnerabilities and created a “structural bear market,” today’s event-based recession will likely “revert strongly” once lockdowns are lifted, according to Goldman. Near-zero rates, massive fiscal stimulus, and high household savings rates make for a new post-recession narrative.
Stocks – particularly lagging cyclical and value names – can climb higher in the long term as economic growth bounces back and investors look to capitalize on a new bull market, the team said.
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