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September 2019


Macro Views


Even with geopolitical noise blurring a favorable growth outlook, we think the US economic expansion could continue to grow at a pace of 2.3% through year-end 2019. US-China trade developments remain a source of risk to profit margins and growth. In our opinion, it may require policy action beyond Fed intervention to contain impact on household consumption and business activity. Read More


We expect the ECB to ease monetary policy and provide fiscal stimulus to combat the slowing euro area economy. These actions will likely induce a response in-kind by central banks of neighboring EU nations. Accommodative ECB policies have historically led to stronger currencies and tighter financial conditions in these smaller markets, requiring central banks of neighboring countries to also follow suit. Read More


The Chinese economy saw its slowest growth of 6.2% in 2Q 2019. Absent trade resolution, a path to recovery would require broad coordination of cyclical policy measures: 1) more fiscal spending as budgeted or via special bond financing, 2) flexible monetary policy, and 3) balanced structural policies. Stimulus may be limited by concerns over debt, inflation, and FX depreciation. Read More


The recent political backdrop in Argentina reminds us of the potential unanticipated consequences of populism. August’s surprise election outcome led to a 14-sigma peso move. Yet, we interpret the event as localized in nature, with no broader EM contagion implications for capital markets. Read More

Market Views


Bouts of episodic volatility are likely to continue in light of geopolitical tensions and moderating global macro data. Still US equities remain attractive in our view given low interest rates and dovish central banks. We expect earnings to grow, driving the majority of returns going forward. Our 2019 year-end price target for the S&P 500 is 3100, and 3400 for 2020 year-end. Read More


Against a slowing economic and destabilizing geopolitical backdrop, European opportunities appear more micro than macro. Significant dispersion in company fundamentals such as EPS growth and profit margins may create opportunities for bottoms-up analysis and concentrated positioning. Read More


More than 30% of sovereign debt is now yielding negative, and less than 15% posts yields above 2%. However negative yields do not necessarily mean negative returns. This unprecedented rate environment does not alter the ability of active investors to identify potential return opportunities – including relative value, positive carry, term structure, and regional exposures. Read More


The relative strength of the US economy amid global uncertainties has supported the dollar, but we expect stabilization in other regions to shift dynamics going forward. Speculative positioning against the euro makes it particularly attractive in our view, while in Japan accelerating capital outflows and exceptionally low yields create additional headwinds for the yen. Read More


August’s powerful bond market rally pushed short-term government yields in many areas to record lows. In fact, there is currently $16 trillion of negative yielding sovereign debt, including German Bunds at -0.64%. While still firmly in positive territory, US rates have also moved sharply lower – a trend that has been met head-on in the municipal market by a
TCJA-induced appetite for tax-free income. Muni investors are now facing low absolute yields and high relative valuation – a condition best addressed, in our view, by broadening one’s borders.  

How low can you go?

The world’s stockpile of negative yielding debt has ballooned to $16 trillion in August, tripling in size from just a year ago. This unprecedented rate landscape has also pushed 86% of global government debt yields below 2%, dragging US municipal rates along with it.

Source: Bloomberg and GSAM.

Yield with benefits

High-tax states such as California (CA), with a marginal tax rate of 13.3%, may present a lofty hurdle for investors to own out-of-state munis. However, CA residents may find extensive availability of non-CA muni bonds inside of 10 years to maturity that provide: 1) a broader opportunity set to improve portfolio diversification, and 2) higher after-tax yields that more than offset the impact of state taxes.

Source: Bloomberg Barclays and GSAM.

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