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Multi-Asset Solutions Outlook 2022

Intensified Fed Policy Uncertainty Adds Market Volatility as Inflation Path Remains Elusive

Until recently, the economic expansion that followed the Global Financial Crisis seemed like it would never end. Then it appeared to do just that when the pandemic hit in early 2020, only to give way to a new cycle of growth and optimism. We invite you learn more in our Multi-Asset Solutions Outlook 2022 where we review our market observations, our outlook, and downside risks to consider.

Market Observations

Uncertainties

When the pandemic first hit, decisive actions and coordination from global policymakers put many economies back on track. But from a monetary policy perspective, uncertainties have only intensified. The yield curve has flattened, the Eurodollar curve is now pricing an earlier start to hikes that would progress at a faster pace and end at a lower level than a year ago.

US Yield Curve Flattening

 

Source: Goldman Sachs Asset Management, Bloomberg. As of December 2021.

Outlook

Policy Uncertainty to Add to Market Volatility

Inflation will remain a key driver for macro uncertainties in 2022. Overall, we expect the path for inflation to remain elusive for most of the year. With price stability the top Fed priority given the improvements in the labor market over the past year, we expect the US central bank to be highly data dependent and its policy uncertainty to add to market volatility.

Labor Conditions

 

Source: Goldman Sachs Asset Management, Bloomberg. As of December 2021.

Asset Class Implications

We expect Equities to remain attractive given strong earnings. Private credit looks attractive, however, quality of high yield issuance is expected to deteriorate. We are less constructive on developed market government bonds given the potential tightening of central bank policy. The EM complex is facing a highly uneven inflation landscape, and the growth-inflation interplay can become even more delicate to navigate Still, attractive opportunities in select markets remain.

EM Inflation Landscape

 

Source: Goldman Sachs Asset Management, Haver Analytics. As of December 2021.

Downside Risk to the Outlook

Notwithstanding the overall constructive outlook, we would like to note a couple downside risks to our view.

 

Macro Front:  A Fed policy error of tightening too much too soon can hurt risky assets and potentially curb inflation below target with negative implications on economic growth.

 

Pandemic Front: Omicron, or a new variant, may lead to a significant decrease in economic activity once more. Related, supply chain disruptions may take longer to be resolved and any reorganization of supply chains could partially roll back globalization, reducing global growth and boosting inflation.

 

Geopolitical Front: Lastly, unexpected major geopolitical events can disrupt markets and the outlook. Against this backdrop, we remain cautiously supportive of risky assets in 2022, expect choppy markets and underscore the need for a dynamic investment approach and careful risk management to navigate the potentially treacherous market conditions ahead.1

 

 

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

Related Insights

Disclosures

This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

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