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November 2019


Macro Views


The Fed delivered another 25 bps of rate easing, which likely reflects the last mid-cycle adjustment. We expect the Fed to hold rates steady through year-end, barring any persistent weakness in data or inflationary pressures. Recent trade de-escalation is also unlikely to change policy direction, with data-dependency remaining a potential key to supporting the economic expansion. Read More


Although the UK-EU established a preliminary withdrawal agreement, the surprise support for a general election makes a Brexit deal contingent on the electoral outcome. Nevertheless, we think PM Johnson will secure enough approval for the renegotiated deal by the new timeline. Risks of a ‘no deal’ remains low at 5%—our revised probability for a Brexit deal stands at 65%. Read More


Temporary de-escalation on US-China trade may offer short-term relief, but we expect tensions to mount again in the absence of clarity on intellectual property and technology transfer. We expect the December 15 tariff to be used as a negotiation tactic for implementing “Phase 1” of the deal, though more likely delayed until 2020 should progress begin to stall again. Read More


Recent divergence between soft and hard growth data is a reflection of volatility in sentiments. In our view, soft data is likely overstating the growth deceleration as survey data 1) tends to diverge from hard data during periods of fiscal uncertainty, and 2) overweights the impact of manufacturing on the economy. We maintain our growth forecast of 2.2% by year-end. Read More

Market Views


We see a potential growing risk of equity markets reaching a ‘fat and flat’ environment where neutral positioning may be justified. In such environments, cash flow enhancing investments such as international or value equities may be valuable as a source of income generation. While we believe the overall environment remains supportive of growth, valuation differentials suggest a high likelihood of sharp, albeit brief, style reversals. Read More


The signaling power of an inverted Treasury curve has likely declined given the influence of global central banks and the sharp decline in long-run term premia. In short, today’s curve is much easier to invert.
In terms of signaling horizon, we would argue that it is not the inversion to fear, but the re-steepening of the 2-10 spread. A post-inversion steepening of this magnitude happens on average 72 days before a recession, while an inversion occurs 642 days in advance. Read More


We see potential for the euro to appreciate against the US dollar if European growth stabilizes and US policy uncertainty persists. The euro may enjoy tailwinds from valuation, short positioning, and cross-border portfolio flows, especially as markets increasingly price in rising election risk in the US, and as growth ex-US improves with the probability of a ‘no-deal’ Brexit declining and US-China tensions improving. Read More


A manufacturing recession has not impacted all commodities as supply constrictions in oil, copper, and aluminum softened the impact of demand trending down to near post-crisis lows. We see opportunity for tactical positioning on gold driven by interest rate differentials and potential US dollar weakening. Read More


The current solid operating environment is supported by trend-like growth, healthy private sector balance sheet, and accommodative monetary policy. A recession is not in our base case for 2019 or 2020, and we expect the macro backdrop to continue to be supportive of capital markets. But what if we’re wrong? Vulnerabilities in the system suggest that if we were to experience a market correction, it would most likely be event-driven as historical signals of cyclical and structural bear markets remain absent.

1. Cyclical Bear Market: Unlikely as Fed remains accommodative

Typically associated with the end of an economic cycle, this bear is a function of elevated inflation and rising rates. Current levels of subdued inflation have allowed the Fed to maintain well-choreographed expansionary policy, limiting the likelihood of a cyclical bear market – which have lasted on average 26 months with a -30% drawdown.

Source: Bloomberg and GSAM.

3. Event-Driven Bear Market: Risk most likely

Elevated geopolitical uncertainties suggest the market is vulnerable to an exogenous shock that could spark a sell-off, but probably would not lead to a domestic recession. Such event-driven drawdowns have lasted on average 7 months with a decline of -26%, and recover to their previous highs in roughly one year. Absent cyclical and structural risks, we would expect a bear market in the current environment to be most likely a shorter-term event catalyzed by a geopolitical surprise.

Source: Bloomberg and GSAM.

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