Goldman is bearish, so what?

Our first-quarter rebalancing went without a hitch yesterday.

We locked arms and held the line. Nobody in our group sells low.

By chance, the market rose immediately after we bought. I have since received emails wondering if I think it will be all up from here, that the stock market is already looking ahead to peak virus and the release of pent-up economic demand.

There’s no reason it cannot go that way. Emotionally, however, it’s best to brace for imperfection.

The team led by David Kostin at Goldman Sachs thinks so.

While they expect the S&P 500 to reach 3000 by year-end (a 14% rise from yesterday’s close at 2627), they “believe it is likely that the market will turn lower in the coming weeks, and caution investors against chasing this rally.”

They suggest that the following three criteria must be met before investors can feel confident that a new bull market has begun:

  1. The virus spread in the United States must begin to taper.

  3. We must see evidence that “extraordinary measures” taken by the Federal Reserve and Congress to support the US economy are working. Will bankruptcies be avoided? Will people return to work?

  5. Goldman’s US Equity Sentiment Indicator must bottom out.

Bulls can counter all three:

  1. On a semi-log plot, worldwide cases of the virus are already leveling out. We’re not out of the woods yet, but we can envision getting there—and the stock recovery will beat us out of the woods.

  3. Anybody waiting for confirmation that bankruptcies will be avoided is going to miss the recovery. How many bankruptcies are fine by Goldman? Surely more than zero, so when does the green light for bankruptcy avoidance go on? Probably about the time the S&P 500 reaches the firm’s 3000 target level.

  5. Maybe Goldman’s sentiment indicator has not bottomed (Although, how can they know?), but others have shown grim sentiment. CNN’s Fear & Greed Index already reached the extreme fear levels it bottomed at in the fourth-quarter 2018 crash. The CBOE Volatility Index (VIX) reached the same panic zone it reached in the subprime mortgage crash.

If you are not simply following our quarterly plan, remember from Sunday’s letter that I recommend building your positions gradually, and with time spans instead of moving average levels or some other metric:

“A time span gets around speculation and emotions involved in other approaches. If you set your limit orders too low, they might not fill. Will you have the emotional resolve to move them higher, then the emotional rigor to not punch a hole in the wall if your original limit-order prices are hit later? Who knows, and who needs to know? Go with a time span.”

And remember:

As long as you are buying and/or holding, you will be fine.

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  1. Joe Wurts
    Posted April 1, 2020 at 3:36 pm | Permalink


    I would be careful from extrapolating from very limited data. One item, when looking at daily confirmed new CV cases is that this number is limited by the number of test kits available, as well as some inevitable scatter in the data. The new cases plot that you linked to which purportedly shows that the new cases are leveling out… well, that plot showed a leveling out several times in the past month, then a jump to a new high and continued growth in the number of new cases. Just like it did today with yet another substantial new high number of new cases. Cherry picking short term numbers, well, good luck with that concept. The good aspect is that the smoothed growth rate appears to be reducing. The death rate increase will hopefully start reducing in a few weeks (that is a lagging number due to the lag between infection and death). I was a bit surprised in that you didn’t do another death comparison this week. Sadly, the numbers are getting less favorable for your desired minimization of CV deaths. My personal view is that the governmental response to CV is completely out of line in terms of the actual effects, as the CV appears to be not much worse than a serious influenza strain, albiet with a much higher infection rate (along with an annoying lack of symptoms for a significant portion of the infected). The largest global effect of CV is via the large economic dislocations that are occurring. These are large, and if one wants to be best positioned for the future, should not be minimized. I’ve friends and family in the US that are already wondering how they will survive (I remember something about 47% of US households have a week or less cushion on expenses, which appears to align with the concerns I’ve seen recently).

    The FED is now projecting up to 32% unemployment for the US in the future. For reference, the great depression in the ’30s got up to 25% unemployment. The VIX numbers, well… I look back on 2008-2009 VIX vs stock market valuation. The maximum VIX was about six months ahead of the minimum stock market value. Assuming we hit max value two weeks ago, well there may very well be some continued bear market in front of us.

    We may be near the market bottom, and a good time to buy. I’d suggest being rather careful at this point in time. Too many people are still too positive about the market future. Remember, the market didn’t turn in 2009 until there was only 18% of the specuvestors that were positive on the market and economy.


  2. He Who
    Posted April 1, 2020 at 4:28 am | Permalink

    Jason, I agree with you wholeheartedly… as long as this time is exactly like the last time the government sponsored a multi-trillion-dollar stimulus/rescue program… oh wait… maybe this time is the first time…

    Carry on!

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