Goldman Turns Cautious on Equities Ahead of the Fed

In a note to institutional clients, Goldman relayed a whim of caution. To retail, they probably sang a different tune. God only knows what the bank really thinks. But one thing is for certain, these two clowns, Mueller-Glissman and Oppenheimer, want to scare you out of stocks here — due to slowing growth and rising rates.

At the same time, they’ve assured us that ‘long term’ things are ok. Europe is doing fine and China seems to be getting their act together. Curiously, however, they now view Yellen as a chief concern — citing weak kneed investors as a risk factor in causing exacerbated moves to the downside — should the uptrend break.

“With growth momentum nearing its peak and rates increasing further with a hawkish Fed, the asymmetry for equities is turning increasingly negative,” Goldman analysts including Christian Mueller-Glissmann wrote in a note for institutional clients. “A slowing cycle makes equities more vulnerable to higher rates and also shocks, e.g. from European politics, U.S. policy, commodities or China.”

“At some point, rising bond yields will become a constraint on equities,” Peter Oppenheimer, a contributor to the report, said in a separate interview. Bond yields are still some way away from normal levels in Europe and Japan, “but in the U.S. we’re getting much closer to that,” he said.

“In the event of a reversal of the trend, these systematic investors are likely to reduce equity exposure quickly, which could exacerbate an equity drawdown and result in a faster and larger volatility spike,” the Goldman analysts wrote.

This is pure rubbish. In other words, rates are rising so be concerned — because once stocks start to head lower — all hell will break loose. Please.

Valuations have been flat for over a year. Moreover, if Fed rate hikes are such a concern, then why not advocate against them? Right, because Goldman wants higher rates to profit from widening speeads. Pardon my conspiratorial hue, but there’s nothing in this report that is meaningful or worth giving a second thought. It’s rank amateur and non-tradeable.

BBG summarizes.

Source: Bloomberg

The analysts suggest investors replace their equity positions with calls, including shorter-dated calls on the S&P 500 and longer-dated Euro Stoxx 50 and Nikkei 225 calls

They are still positive on equity returns longer term, with a 12-month overweight rating for all regions except the S&P 500, which stays underweight

Rising U.S. rates should benefit Europe and Japan even as they become a headwind to the U.S., and there is also potential for a relief rally in the event of a “market-friendly outcome” to the French elections

Goldman is also positive on the Asia-Pacific region, especially China, with the firm returning to an overweight on Chinese stocks earlier this week on mounting evidence of strength in the economy.