We believe economic growth will widen globally and labor markets will tighten further. Although developed markets have led the upswing in growth, recoveries in the emerging markets have contributed as well. Among developed markets, we see the Euro area in particular as a bright spot. The region's positive growth surprises, including strength in manufacturing, have outpaced the US and cyclicals are leading a much-awaited earnings rebound. The positive emerging markets picture that we have seen reflects moderate inflationary pressures and rebounding earnings. Read More
The timeline for equilibrium in the oil market has been blurred, with several offsetting factors collaring our near-term price outlook. Although production growth in US shale is firmly intact, this year's robust energy demand growth, OPEC's decision to extend production cuts through March 2018, and recent inventory draws may point to upside price risks. For the time being, inflationary expectations may need to look elsewhere for support. Read More
Labor market strength and subdued market inflation expectations have left the outlook for Fed policy hanging in the balance. In our view, investors concerned about monetary tightening might be inadvertently overlooking the "dual" in the Fed’s dual mandate. In short, we consider improvements in the labor market to be a meaningful offset to the policy trajectory implied by inflation expectations alone. We anticipate ongoing gradual rate hikes and for balance sheet normalization to begin in 2018. Read More
Shifts in the volatility environment have generally required an exogenous shock, whereas today's widening global economic expansion provides what we see as a sturdy foundation for markets. On p. 2, we show how shifts higher in volatility have generally pushed investment outcomes further into the "tails" – lower lows and higher highs. While de-risking a portfolio may specifically point to "lower lows" as an investor’s expected outcome, a volatility-managing strategy, in contrast, could potentially cater to either outcome. We think portfolios should be built strategically around the inevitability of exogenous shocks, as efforts to tactically predict their precise nature and timing is generally not possible. Read More
Text Source: GSAM. OPEC refers to Organization of Petroleum Exporting Countries. Fed refers to the US Federal Reserve. The Fed's dual mandate refers to its congressionally defined mandate to maximize employment and stabilize inflation of prices. "Tails" refer to more rare and extreme investment return outcomes that are farther from the average return outcome. Past performance does not guarantee future results, which may vary.
Chart Source: Haver, Markit, and GSAM. Analysis as of June 2017, the most recent available data. Table shows headline readings for Composite (weighted aggregation of manufacturing and services sectors) Purchasing Managers Indices. PMI surveys based on questionnaire responses from panels of senior purchasing executives (or similar). Respondents are asked to state whether business conditions for a number of variables have improved, deteriorated, or stayed the same compared with the previous month, as well as to provide reasons for any changes. A reading of over 50 indicates expansion; a reading of less than 50 indicates contraction. 12m ∆ represents the change since the reading 12 months prior to the most recent data. Developed Markets and Emerging Markets refer to GDP-weighted categories for regional PMIs as categorized by Haver. BRIC is an acronym that refers to Brazil, Russia, India, and China, which are all grouped in a similar stage of economic development. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this document.
Today's low volatility equity markets are begging the question: what happens if and when volatility rises? Low volatility has historically lasted around 18 months, with the lengthiest period persisting for nearly four years. We believe that the broadening of global growth is likely to anchor volatility, but exogenous shocks are always a possibility. History suggests that a turn toward higher volatility could mean outsized S&P 500 Index moves either positive or negative. Risk management, not de-risking, strikes us as the investment strategy response to explore.
Accurately predicting and timing shifts in market volatility is challenging to the point of futility. Roughly half of S&P 500 volatility spikes in the past occurred during major geopolitical events. The other half were more traditionally economic or financial in nature. Identifying catalysts is generally only possible with the benefit of hindsight, but we think portfolios can be built around their inevitability.
The tight band of historically observed S&P 500 returns in low volatility environments has frequently given way to greater variation once higher volatility has taken root. In such periods, investors have experienced more of the statistical "tails" – higher highs and lower lows. We therefore favor strategies that manage risk based on the potential for wider return outcomes.
Top Chart Notes: Top panel chart shows S&P 500 Index rolling annualized 60-day volatility from January 1928 to July 2017 and labels various market events that occurred when volatility moved significantly higher ending low volatility periods. These events are illustrative examples. Volatility is measured by annualizing the standard deviation of daily S&P 500 Index total returns. The bottom panel chart is for illustrative purposes only and analyzes all 11 events that have ended sustained low volatility periods since 1928. Sustained low volatility periods refer to periods when the 2 year moving average of S&P 500 volatility dipped into or below its 25th percentile (bottom quartile of its history). These events include: Economic (1929 Great Depression, 1978 Stagflation, and 2015 China Stock Market Crash), Financial (1987 Black Monday, 2000 Internet Bubble, and 2008 Financial Crisis), and Geopolitical (1946 Post-WW2 Demobilization, 1956 Suez Crisis, 1962 Cuban Missile Crisis, 1970 Post-Vietnam War Demobilization, and 1973 Oil Embargo). Please see additional disclosures at the end of this document. Past performance does not guarantee future results, which may vary. Bottom Chart Notes: Chart shows the historical range of 12 month S&P 500 total return outcomes during low volatility periods and non-low volatility periods. Low volatility periods refer to periods when S&P 500 volatility dipped into or below its 25th percentile. The histogram illustrates the frequency distribution of different return outcomes for both types of volatility periods. Frequency represents the percent of the total cases. For illustrative purposes only. Data from January 1928 to July 2017. Past performance does not guarantee future results, which may vary.
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