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    MARKET PULSE 
    |
    February 2024

    MARKET PULSE | February 2024

    Macro Views

    Monetary Policy

    Recent rhetoric from major developed market central banks has tilted hawkish as monetary policy officials hope to prevent financial conditions from easing. We expect that the ECB will reduce its policy rate in April while the BoE and Fed will begin easing in May, though risks skew to slightly later cuts. Read More

    Geopolitics

    The risk of military escalation may be growing as global elections unfold and shipping disruptions in the Red Sea persist. We see Euro area core inflation rising slightly in the short-term due to an increase in shipping costs, though the impact may be negligible. US inflation should largely remain insulated from these higher costs, in our view. Read More

    US Politics

    As many expected, former President Trump won the Iowa caucuses and New Hampshire primary by double-digit margins. Trump’s early wins have put him in a strong position to become the Republican nominee, and it is worth noting that no candidate with a twenty-point polling lead entering an election year has lost the primary election. As such, we feel a Trump-Biden rematch remains the most likely outcome. Read More

    Consumer

    Tight labor markets across most economies have continued to buffer the global consumer. The unemployment rate has edged down to 6.4% in the Euro area and moved essentially sideways at historically low levels elsewhere. Household balance sheets generally remain strong and real income growth is firming up. Debt service ratios are healthy in Japan, the US, and Europe, but have jumped in Australia, Canada, and the UK due to a higher share of shorter-fixation mortgages. Read More

    Market Views

    US Equities

    The S&P 500 has traded at a historically elevated valuation on both an aggregate and equal-weighted basis. We believe further valuation expansion is unlikely without an additional decline in yields. The S&P 500 P/E has expanded from 17x in October to 20x in January, ranking in the 85th percentile since 1990, a level we expect the market to maintain throughout 2024. Moderate index appreciation should be led by earnings growth this year, in our view. Read More

    Global Equity

    Japanese equities have extended last year’s strong performance, attracting global investors' attention. This trend may continue as the region benefits from a healthy inflation pickup, heightened focus on corporate earnings, and attractive investor incentives to allocate to equities. Though current positioning remains light, we believe net flows will pick up to match this upbeat tone. Read More

    Small Caps

    Nearly two-thirds of the variation in Russell 2000 12-month returns can be explained by starting valuations and real GDP growth. Given the current combination of discounted prices and a healthy economic outlook, GIR’s model implies that the Russell 2000 should return roughly 15% in the next 12 months. Moreover, the prior three occasions in which the S&P 500 notched an all-time high while the Russell 2000 traded at a drawdown similar to its current magnitude resulted in an average Russell 2000 12-month return of 29%. Read More

    Municipal Bonds

    If inflation normalization continues and the Fed moves closer to rate cuts, we believe peak opportunities in munis may begin to close. We think yields will move lower in 2024 and valuation ratios relative to Treasuries may tighten further, informing our preference to lock in longer-term yields. Read More

    Municipal Bonds

    Inflation and its underlying drivers appear poised to cool in the year ahead, which may allow central banks to pivot from their current restrictive stances. The precise magnitude of rate cuts in 2024 may be uncertain but one trend seems clear: shorter-maturity interest rates will likely fall. We believe this may encourage a reallocation from cash to asset classes that have more durable cash flows. Municipal bonds, with elevated yields and healthy credit profiles, may serve as an attractive alternative.

    CASH COWS

    Inverted yield curves have offered rare opportunities for investors to be compensated more for taking less risk. The spread between the 2-Year and 10-Year US Treasury (UST) yields has been negative for roughly 18 months, one of the longest periods of inversion in history. As a result, investors have captured attractive risk-adjusted yields with assets in money market funds growing by $1.4 trillion since the Fed began its hiking cycle in March of 2022, representing a 31% increase over that time.

    Source: Bloomberg and Goldman Sachs Asset Management.

    WHAT GOES UP MUST COME DOWN

    The Fed appears poised to cut its policy rate in 2024 in response to cooling inflation and a softening labor market. With cash rates set to decrease as a result, our fixed income strategists anticipate a re-steepening of the curve, with the 10-Year UST forecasted to yield 30 bps more than the 2-Year UST by year end. We believe this normalization will highlight the importance of securing longer-dated cash flows found within intermediate-duration fixed income.

    Source: Atlanta Fed, GS GIR, and GS Asset Management.

    SEIZING TODAY'S YIELDS

    Fortunately for investors with elevated cash holdings today, we believe opportunities can be found within the municipal bond market. Beyond strong yields, credit quality has been supported by one-time federal grants. Although this support has begun to wane, previous aid has allowed municipalities to strengthen fiscal positions by building reserves and/or paying down debt, all while tax receipts have remained strong given the avoidance of a US recession.

    Source: Bloomberg and Goldman Sachs Asset Management.
    VIEW LESS DISCLOSURE

    “We” refers to Goldman Sachs Asset Management. Top Section Notes: Source: Bloomberg and Goldman Sachs Asset Management. As of January 17, 2024. Middle Section Notes: Source: Atlanta Fed, Goldman Sachs Global Investment Research, and Goldman Sachs Asset Management. As of February 1, 2024. Bottom Section notes: Source: Bloomberg and Goldman Sachs Asset Management. As of January 23, 2024. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.

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