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November 2018


Macro Views

Moderation Consternation

We are monitoring a slowing trend in global growth, which has decelerated as financial conditions have tightened, trade rhetoric has escalated, and geopolitical uncertainty has persisted. Q3 US GDP growth slowed to 3.5%, Euro area flash Purchasing Managers’ Indices weakened, and dollar strength has proved challenging internationally. Read More

Just What The Doctor Ordered

At 113 months, the US economic expansion is near setting a new record. Unemployment at 3.7%, which we believe may touch 3.0% in 2020, and inflation already at the Federal Reserve’s (Fed) target, suggest that higher rates are warranted. Even the Fed’s rate hike expectations, long undershooting policy, have been rising. We view a US slowdown as both preventative of overheating and necessary to generating sustainable growth. Read More

Balanced Financial Imbalances

Just prior to the global financial crisis, housing prices, lending standards, mortgage debt, consumer loans, and financial sector liabilities were all flashing warnings signs. Today, while some indicators are at elevated levels, in aggregate, we believe that the likelihood of a 2008-like downturn is minimal. Read More


Following the results of US midterm elections, with Republicans maintaining control of the Senate and Democrats gaining control of the House, infrastructure spending may become the only area with room for bipartisanship, though we still expect a fading boost to economic growth from fiscal policy. Read More

Market Views

Equities May Have Missed The Memo

The S&P 500’s 3.3% one-day sell-off in October represented an 8 standard deviation event which we believe is unjustified. Historically,
1) an equity pullback coinciding with an expansionary ISM index has preceded a year of positive returns;
2) equity returns have been positive in the year following a midterm election; and
3) ~75% of equity market peaks have taken place more than two years after earnings peaks. Read More

Q3 Earnings Season

In our view, corporate fundamentals remain healthy. Corporate earnings were met with investor focus on rising costs, margin sustainability, trade policy, and financing conditions. Investor sentiment since then has evolved. With the majority of companies reporting, 56% have beaten consensus by more than one standard deviation, and margins have expanded with earnings growth exceeding sales growth. Read More

Mixed Messages

Despite October’s equity declines of 7% (S&P 500), 8% (MSCI EAFE), and 9% (MSCI Emerging Markets), fixed income told a different story. Credit fell less than 2% and municipal bonds were flat. We believe that Q3 earnings, equity valuations, and rising rates place risk assets in a more favorable position than fixed income. Read More

Growth In Value

Investors, in our view, should prepare for an end to growth stocks’ remarkable dominance over value. A reversal already took place to a degree during October’s market volatility, when growth sharply underperformed. On the next page, we outline how growth’s run created overweights in blend allocations; investors may want to consider rebalancing. Read More


Valuation differentials between growth and value stocks are at their all-time high today, driven by a multi-year surge in Information Technology and Consumer Discretionary sector returns. Growth has dominated value for 20 consecutive months, the longest monthly period on record. Though timing the style reversion is challenging, after nearly two years of powerful growth dominance, we think investors may want to revisit their portfolio weightings to prepare for the possibility of a change in market leadership.

Growth trades rich to value...

US large cap growth stock valuations have moved to extreme levels versus their value-oriented counterparts. The valuation differential today stands at a high of 7.6x and 5.8x for P/E and P/B measures, respectively. In our view, recent market volatility has highlighted the potential vulnerability of current valuation differentials.

Source: Bloomberg and GSAM.

Growth outperformance would have driven an unintended growth tilt in a portfolio.

A portfolio that was not rebalanced would have established a growth tilt overtime, swayed by strong growth returns. Under the 1-, 2-, and 3-year return periods, a balanced portfolio would have created a growth overweight of 4%, 5%, and 3%, respectively. Investors may want to consider strategically rebalancing portfolios in an effort to be well-positioned for any resurgence of value leadership.

Source: Bloomberg and GSAM.

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