Goldman Sachs Group Inc. (NYSE: GS) may be in the hot seat over its commodities business right now, among other issues from time to time, but the firm is still one of the most revered financial powerhouses in the world. It is even a Dow Jones Industrial Average component. Now we have a list of the firm’s top predictions for 2015. What stood out after digesting the comments in the past day or so is that they echo many of the thoughts that Bill Gross wrote about in his first investment outlook after he joined Janus.
The most important theme that Goldman Sachs was forecasting, at least by our take, is similar to what Bill Gross has warned about previously, and not just in his first Janus investment outlook commentary: investors and savers are going to have to learn to live in a low-return world. Should that say “keep living in a low-return world”?
Goldman Sachs now sees the S&P 500 Index hitting 2,100 by the end of 2015. In short, it expects roughly 5% stock gains for the year. The one thing worth noting is that the current level is right at 2,050. After a bull market that is nearing six years and that has risen more than 200% from the selling climax low of 666, is that enough reward to stay heavily invested in stocks? Now keep in mind that Goldman Sachs noted that the S&P is trading at the high-end of a fair value range based on metrics like price-to-earnings and price-to-book ratios.
Volatility is expected to remain low. Maybe the upside of 2,100 for the S&P 500 doesn’t sound great, but that means that sell-offs should be bought rather than sold. If you get another September/October stock market sell-off, let’s just say that you know by now what to do!
Gross warned: “While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios.”
Rising Interest Rates
The Fed is expected to raise interest rates relatively later than sooner, perhaps by September of 2015. Still, Goldman expects the Fed to hike rates faster than the markets are expecting. The firm sees the 10-year Treasury yield rising from roughly 2.30% to or above 3.0% by mid-2015.
Gross’s recent 2014 projections for rising rates were mid-2015, although this has been ongoing in his views rather than brand new. Gross gave predictions for the market ahead after a Biblical seven years of fat with another seven years: Bonds returning 3% to 4% at best and stocks returning 5% to 6% on the outside. Gross said: “That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?
Improving European Stocks
Goldman Sachs does not believe the expected strength coming in 2015 is reflected in the market yet. The firm noted the potential effects of a European Central Bank round of quantitative easing.
Gross warned on QE: “While monetary policy with its Quantitative Easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains — especially in the U.S. — they have brought prosperity forward in the financial markets. If yields can’t go much lower, then bond market capital gains are limited. The same logic applies in other asset categories.”
Falling oil. The firm sees oil’s downside down around $70 per barrel. This will create a new oil order, and the scope for downside surprises is likely not over as oversupply risks remain.
Strong dollar. The firm expects a further slide in the euro, falling to $1.15 during 2015. The euro’s range of the last year is roughly just under $1.24 to $1.40.
Emerging market health. Local currency emerging market bonds are expected to do well under a low-inflation environment. India, Chile and Thailand were called standouts in external imbalances.
Growth in China (or lack thereof!). A bumpy downshift is expected to keep gains in mainland China limited as the nation deals with leverage and housing woes. GDP growth is expected to be 6% to 7% in the next two years.
Long-lived high yield. The firm thinks that the underperformance of late in the high-yield and junk bond market is expected to be temporary, as the economy is expected to keep the credit risks from getting out of hand.
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