Where you can make the most money on stocks when the sale ends: Goldman

Where you can make the most money on stocks when the sale ends: Goldman

Where you can make the most money on stocks when the sale ends: Goldman

  • Stocks are having one of the worst year-to-date starts ever.
  • In a recent note, Goldman Sachs explained what needs to be done to hit a bottom.
  • They also shared where the best odds would be as the outlook brightens.

When stocks sell out due to an aggressive Federal Reserve shift — such as the current correction — there is one criterion that Goldman Sachs usually says must be met before the market bottoms.

And it’s pretty simple: the Fed needs to reverse its stance and go back to soothing, regardless of the state of the economy.

“We find that monetary policy-driven stock corrections have, on average, bottomed out when the Fed has moved into easing, regardless of whether activity has fallen,” Vicky Chang, a global market strategist at the bank, said in a June 14 note. to customers.

“In fact, the activity trough in these episodes has come a few months on average after the market trough,” she continued. “If the source of the correction is monetary tightening, a shift to monetary easing has eased stocks quite immediately as the market expects activity to pick up eventually.”

Exactly what that turnaround looks like can take different forms, depending on what the economy looks like. When the economy is good


recession

, a turn towards moderate policies will most likely be more pronounced. In the case of a less severe slowdown, it may be good enough if the Fed signals that it will slow the pace of tightening, Chang said. However, inflation will likely need to show signs of slowing down before the Fed pulls out.

Inflation has peaked 13 times above 3% since the 1950s, and stocks usually rebounded after those spikes, said Sharon Bell, senior European portfolio strategist at Goldman. The strongest recovery came when interest rates fell, valuations hit historic lows or economic growth picked up, she said.

inflation peaks


Goldman Sachs


Goldman economists see inflation beginning to fall in late fall of this year (it rose to a 41-year high of 8.6 percent in May). If that happens, Bell said there are a few areas that should lead the recovery in the US and Europe.

What to buy when inflation peaks?

One is cyclical equities, which tend to perform well when economic activity picks up again. Bell also said that Bank and consumer cyclical stocks – which are themselves generally cyclical – should outperform.

“Over the past decade, higher inflation has been associated with the outperformance of cyclical stocks and value, but this has not been the case of late (outside of commodities), as high inflation is increasingly driven by supply — rather than by demand, and acts as a speed limit for growth, preventing central banks from easing their policies even as growth slows,” Bell said.

She continued: “A spike in inflation should therefore benefit cyclical stocks, as well as stocks in the banking and consumer goods sectors whose correlations with inflation have recently turned sharply negative.”

Investors seeking exposure to the above market areas may want to consider exchange-traded funds such as the Consumer Goods Select Sector SPDR Fund (XLY) and the SPDR S&P Bank ETF (KBE).

Bell also said that European equities as a whole tend to outperform the US market in the 12 months following an inflation spike.

The iShares MSCI Eurozone ETF (EZU) offers broad exposure to European equities.

However, Goldman expects inflation to remain high and volatile until late in the fall. So for now, they prefer what they call “stable growth stocks” in the US – which they said have beaten the S&P 500 since late 2021. And in Europe they like companies with ‘high and stable margins’.

“The uncertainty about inflation’s potential path from here and the likelihood that it will remain high even if it peaks in major economies in the coming months is likely to prevent stocks from rising sharply in the near term, and is one reason why we are neutral.” shares in our asset allocation of 3 million,” Bell said. “We recommend that investors on both sides of the Atlantic focus on companies that can withstand more volatile and higher average inflation levels in a slightly weaker growth environment.”