By Randy Myers
Viewed in isolation, there are plenty of reasons to feel negative about the U.S. economy and financial markets. There’s the inverted yield curve in the bond market, which can be a harbinger of recession. Consumer confidence is low. Geopolitical tensions are high. And inflation, while moderating, is still weighing on the American psyche.
John Tousley, managing director in the Client Solutions Group at Goldman Sachs Asset Management, encourages investors to take a broader view of what’s happening and suggests they’ll see a more positive picture if they do.
“There is a high degree of pessimism throughout the economy,” Tousley acknowledged during a presentation at the 2024 SVIA Spring Seminar in late April. “You can find focal points that will lead you to a bearish conclusion about the economy. But we think the more you pull back and the more you observe … (the more you’ll see) why we are constructive on the economy and expect it to continue to grow.”
Tousley serves as global head of the Market Strategy team, Strategy Advisory Solutions, for Goldman Sachs Asset Management. In that role he focuses on global capital markets research, macro strategy, and implementation of that strategy. At the SVIA seminar, he ticked through a long list of factors that support a positive outlook on the economy, which the Goldman Sachs Global Investment Research division expects to grow 2.9% this year. Conversely, they only see a 15% chance of slipping into a recession over the next 12 months.
High on the list of positives, Tousley said, are above-trend levels of immigration into the United States, which are expanding the labor force. As a country’s labor force grows, he said, so does its potential for economic growth.
Tousley added that the Federal Reserve appears inclined to believe that a 2.6% economic growth rate is digestible—that inflation can still be managed at that level. Goldman Sachs Asset Management expects inflation of 2.7% this year, as measured by core personal consumption expenditures, which reflects ongoing improvement, but at a rate of improvement slower than in the second half of 2023.
Still, Tousley is not worried about inflation. The Goldman Sachs Global Investment Research division continues to expect that the Federal Reserve will cut its target for the federal funds rates twice this year, and then continue with quarterly cuts until that rate reaches a neutral level, which Goldman Sachs Global Investment Research currently pegs at about 3.0-3.25%. The Fed’s federal funds rate target currently is 5.25% to 5.5%, which Tousley said is “too restrictive” to be sustainable.
Tousley also said that an inverted yield curve is a less reliable predictor of recession than it was 40 years ago, and that when the yield curve begins to revert to a more normal shape it will be primarily due to a reduction in short-term rates. Goldman Sachs Global Investment Research anticipates yields on the 10-year Treasury note will fall to about 4.25% by year end, down from recent levels around 4.65%.
As for equities, Tousley said Goldman Sachs Global Investment Research anticipates that the S&P 500 stock index will gain about 9% this year, finishing around 5,200—or about where it stood in early April—which would be considered fair value. That’s just one of four scenarios deemed most likely, though, with others ranging from a finishing point anywhere from 4,500 to 6,000. To hit the higher target, he said, yields would need to come down in the fixed-income markets without an economic slowdown.
As to what Goldman Sachs Asset Management worries about, Tousley mentioned the yield curve, less because of its current inversion and more because an inverted yield curve moving back to its more typical shape is an even more reliable indicator of a coming recession. But he said that predictive power holds true only when accompanied by confirming signals, including stock market weakness and widening credit spreads. Goldman Sachs Asset Management, he said, expects credit spreads to stay stable this year.
Tousley also cautioned that the stock market is currently priced for a wealth of good news—a soft landing when the economy does begin to slow, resilient corporate profits, stable labor conditions, and containment of geopolitical conflicts. Should reality veer in another direction it could be harmful to equity markets.
“We do worry about the geopolitical environment,” Tousley conceded. “If we get direct engagement militarily between additional counterparties, that changes the math around the Middle East,” he cautioned.
Tousley blamed much of the pessimism around the economy on several factors, including the way inflation’s impact lingers even after prices begin to level off. Political biases play a role, too. When a Democrat is in the White House, for example, many Republicans tend to say the economy is bad regardless of what it’s doing, as observed by Morning Consult[1].
Tousley closed by advising that there is virtually no relationship between election outcomes and the predictability of market responses.
“That does not mean that elections don’t matter,” he said. “What I’m telling you is elections are not reliably or repeatably investible.”
Article Notes: Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of May 20, 2024. Language outlining this article has been written by Randy Myers from Stable Value Investment Association.
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[1] Morning Consult. “Voters’ Views of the US Economy: Not Bad, but Not Great.” May 1, 2024
