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Better, Stronger, Faster
00:00 / 16:46
Better, Stronger, Faster

Better, Stronger, Faster

Today’s US-led global expansion has a reasonable probability of becoming the longest economic expansion on record, in excess of 120 months. Although the age of the expansion often prompts questions of sustainability, we would stress that previous expansions typically have not died of old age.

On the contrary, there is ample evidence that the global landscape is better, stronger, and faster today than at any previous point in the current expansion.

  • Better: The breadth of participation across economies has deepened. From housing to consumption to manufacturing and services, economic momentum has become more comprehensive.
  • Stronger: Nearly all countries (94% globally) have been generating positive economic growth year-over-year.
  • Faster: More than half of all countries (61%) are experiencing acceleration in year-over-year growth.

Lest we be accused of unbridled enthusiasm, here is a note of caution. Data suggests that while some of the strongest returns have occurred during the later stages of an economic expansion, these returns have often grown more idiosyncratic, volatile, and negatively skewed as the cycle ages. In our view, these patterns create a strong rationale for greater selectivity and risk management.




Broad participation and synchronized geographically. Growth acceleration may have peaked, but recent easy financial conditions and fiscal prospects have also been supportive.


Diminishing excess capacity may support prices longer-term, though the adjustment higher is likely to be gradual and country specific as endogenous factors reassert influence.

Monetary Policy

Global central banks enter an important era of policy transition requiring precise communication on rate and balance sheet normalization. Leadership changes remain top of mind.


The possibility of pro-cyclical US policy has continued to intrigue markets, but the news cycle of near-constant controversy and legislative bottlenecks are blocking meaningful initiatives.


Geopolitical risk dominates, followed by the pace of US hikes, Brexit turbulence, Chinese macro stability, lofty valuations, and diminished market liquidity.

Better, Stronger, Faster

Source: International Monetary Fund, Haver, and GSAM. Number visuals on the left represent the percent of the 193 UN member countries with economies that are experiencing positive year-over-year Gross Domestic Product (GDP) growth (94%) and the percent of UN member countries with economies that are experiencing both positive and accelerating year-over-year GDP growth (61%). 2017 numbers refer to forecasts from the International Monetary Fund. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Right side line chart shows trailing 30 month volatility of the Markit Global Composite Purchasing Managers’ Index monthly from 2000 to August 2017. Composite refers to a weighted aggregation of manufacturing and services sectors. 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. Please see additional disclosures at the end of this presentation. Volatility refers to standard deviation.

Key Takeaway

We expect more of the same. We believe the pace of the recovery has likely peaked, but growth trends should persist as more developed and emerging markets participate. Central banks remain accommodative.





Equities remain our preferred asset class, but the 2017 run-up has further tempered our return expectations globally. Earnings growth is likely to be the primary driver in light of full valuations.


The market appears to be underpricing the pace of Fed hikes and overpricing the value of weaker inflation data. Government debt may be a less effective hedge.


Tight spreads and higher leverage reflect late-cycle conditions, leaving us cautious on credit spreads. We believe it is still too early to de-risk, but appropriate to amplify selectivity.


Euro strength largely reflects the repricing of central bank policy and better-than-expected European growth. We believe the US Dollar appears cyclically cheap.


Low volatility reflects the strong macro backdrop, but may be highly vulnerable to exogenous shocks, especially in the form of political catalysts and geopolitical tensions.

Too Early to De-Risk

Source: NBER, Bloomberg, and GSAM. Data from January 1928 to August 2017, the largest available dataset for the S&P 500 Index. Chart shows S&P 500 Index total returns for the 12 month period 2-years prior and the 12 month period 1-year prior to the start of a recession. Recession periods are defined by the National Bureau of Economic Research. Past performance does not guarantee future results, which may vary.

Key Takeaway

Absent a shift in macro drivers, we believe macro conditions remain supportive of risk assets, even as valuations suggest moderate return potential and increased tail risk.

The Know
Market pricing of US tax reform has changed

The impasse in Washington may have led many investors to rule out tax cuts.

The returns of S&P 500 stocks with the highest corporate tax rates appear to reflect market skepticism on tax reform.

The initial surge of stocks with the highest sensitivity to tax policy changes has since given way to parity with the broader market. While the timing and magnitude of potential tax legislation remains uncertain, we believe the market could respond favorably to any legislative clarity.

Source: Bloomberg, Goldman Sachs Global Investment Research, and GSAM.

The How
Watch for signs of life in tax policy

Even a modest change in the status quo could be positive for equities.

Current corporate tax reform proposals could potentially lift S&P 500 earnings by as much as 8%.

In our view, a reduction of the highest corporate tax rate from 35% to 20% could boost earnings for US large cap stocks by $10. For US small cap stocks, we believe the positive impact may be even greater, with the Russell 2000’s median effective tax rate at 32% and the S&P 500’s at 26%.

Source: S&P Capital IQ, Goldman Sachs Global Investment Research, and GSAM.

The Know
Markets are often challenged

Either stocks or bonds have been under pressure about half the time in recent decades

Either rising rates or an equity bear market have prevailed with surprising frequency since 1998.

Investors’ experience has often contrasted with the recent low market volatility. We believe investors should keep the inevitability of challenging market environments (like periods of rising rates or falling equity prices) in mind as they construct investment portfolios.

Source: GSAM and Bloomberg.

The How
Consider your alternatives

In challenging market environments, alternative strategies have often been attractive.

We think a diversified approach to alternatives is worth a fresh look in the current environment.

In periods when rates rose and when equity returns were negative, category leadership was variable— leaders became losers and vice versa. The dynamic nature of the current market environment underscores the logic of diversifying across strategy types.

Source: GSAM and Bloomberg.

The Know
Data everywhere

The explosion in unstructured data is expanding inputs, including from new sources such as the Internet of Things.

As much as 90% of all data has been created in the last few years, but less than 1% of this data is being used or analyzed.

Cloud-based computing is enabling machines and other physical devices to communicate. The interconnectivity enabled by the Internet of Things and related phenomena is driving exponential growth in unstructured data. Harnessing this digital deluge is an opportunity for every industry.

Source: McKinsey and GSAM.

The How
Big Analysis

Converting unstructured data into investment insight requires both capacity and judgement.

Data alone has little worth unless it can lead to timely and informed action.

The democratization of data provides access to enormous amounts of information on virtually every public company. Collecting and interpreting this data requires a sound process. We believe combining human judgement with economically motivated design and technological prowess may achieve a repeatable informational advantage.

Source: GSAM.

The Know
Emerging easing

Many EM central banks still have room for accommodative policies.

More manageable inflation dynamics enable central banks to re-focus on growth.

EM macro fundamentals have vastly improved; the more benign inflation environment suggests that EM monetary policy could ease further, a positive foreshadow for growth. However, selectivity may be critical as EM countries are at different stages of the economic cycle.

Source: Haver, Bloomberg, and GSAM.

The How
Yield to growth

Despite improving flows, EM local rates still offer greater yield compared to DM.

While DM yields are negative when adjusted for inflation, EM Debt stands out in terms of fundamentals and technicals.

Fears since the US election seem to have dissipated, with large inflows into EMD in 2017. Even considering strong YTD performance, yields remain attractive. We believe that as EM economic growth continues to outpace that of DM in 2017-2018, EMD could see further improvement in yields and stronger technical support from flows.

Top chart source: IIF, and GSAM. Bottom chart source: Bloomberg, and GSAM.

The Know
An emerging tide

Synchronized emerging market growth has often pointed to longer and more sustainable market cycles.

The broader the participation in the economic expansion across emerging markets (EM), the longer and deeper the cycle.

EM economic recoveries in our view can find strength in numbers. When EM economies move together, this can be a sign of the health and sustainability of the expansion.

Source: Goldman Sachs Global Investment Research and GSAM.

The How
Zoom in

What emerging markets investors own has often been more important than where the asset is located.

Security selection matters in emerging markets.

Decomposing MSCI Emerging Markets Index returns over the last three years reveals that security selection historically has been a more significant driver of performance than top-down, country-level trends. We believe this trend will continue in the current market environment.

Source: Factset, Goldman Sachs Global Investment Research, and GSAM.

The Know
Japan’s growth gains momentum

Domestic demand strengthens and business confidence hits new highs.

As the economy improves, Japan’s manufacturers are now most optimistic in over a decade.

The Japanese economy is experiencing a rotation in its drivers of growth, from net exports to more domestic demand driven.As the BoJ’s Tankan survey shows (a very "real-time" read of corporate sentiment), the actual and forecasted business conditions (for all enterprises in all industries), have meaningfully improved and are touching record highs.

Source: Bank of Japan, Haver and GSAM.

The How
Focus on the improving margins

Together with business confidence, the earning growth story becomes a compelling reality.

Japanese corporates’ net profit margin hits a fresh 20-year high.

Thanks to past restructuring efforts and more recently, the improved corporate governance environment, net profit margin continue to improve, irrespective of the recent strengths in the Yen. In our view, improving manufacturers’ sentiment, together with steady top-line growth and rising margins could continue to fuel the strong growth in total profits.

Source: Factset and GSAM.


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