Goldman Sachs has sought to reassure investors after seeing warning signals of a market peak.
The investment bank has built a “Bear Market Risk Indicator” to gauge when a market may have topped out. This factors in valuations, ISM Manufacturing data, unemployment, inflation and the yield curve.
Goldman’s September strategy paper said the indicator currently points to a “high risk” of a bear market, but chief global equity strategist Peter Oppenheimer said Thursday that long-investors should be reassured.
“First, it doesn’t make that much sense to try to identify the absolute peak of the market. Partly because if you sell a little bit early then you are usually in the same position as someone who waits for a bear market to start,” said Oppenheimer.
“The second point is when you get a bear market it doesn’t start with a huge collapse in one direction. You tend to get a lot of volatility around the peak. And nearly always a correction is followed by a very sharp bounce so typically you get another chance to reassess,” he added.
Oppenheimer said using 200 years of U.S. data, Goldman splits bear markets into three categories: cyclical bear markets, which typically relate to the economic cycle; event-driven bear markets (such as a war or oil price shock); and structural bear markets, triggered by structural imbalances and financial bubbles.
Goldman’s analysis noted that while the Bear Market Risk Indicator was currently “high” at 67 percent, it was being stretched disproportionately by the valuation input, which was itself being inflated by loose monetary policy and low bond yields.
The bank added that as financial imbalances and inflation were both currently low, there were good reasons to “worry less than in the past.”
Oppenheimer did, however, concede that the era of easy money has pushed investors into riskier assets and therefore any correction could be sharp.
“In a sense, what we have seen over the last eight years is an environment of disinflation in the real economy but significant inflation in financial assets,” he said.
“Much of that is reflective of near-zero rates and QE (quantitative easing) and it has pushed investors up the risk curve, paying a lot more for assets. Valuation increases have accounted for much of the returns in financial assets, so if there is a shock it is likely that the adjustment could be more rapid, and if not, deeper.”