Monthly Market Pulse: June

Macro Views

US Banking

Market pricing has run ahead of economic risks for US regional banks. Conservative and tighter lending standards are underway, but early US growth damage appears digestible (0.4pp drag on YoY basis) and concentrated in CRE and manufacturing. Increased regulatory capital, funding costs, and bank consolidation reflect key risks. Read More

US Labor

US wage growth has stayed above trend at 4.5%, indicating that a further decline in job openings is required to dampen inflation. Still, we believe official measures have likely overstated labor demand given a smaller sample and lower response rate than usual. GIR’s estimate from alternative data shows a jobs-workers gap of 3.2mn, two-thirds lower from the peak, while the layoff rate remained near pre-pandemic level. Read More

Inflation

Alongside controlled US inflation expectations, we expect declining prices for health insurance, new rentals, and supply-constrained goods to drive US core PCE down to 3.4% by YE. Meanwhile, optimistic growth and persistent price pressures have presented a double-edged sword for Europe, in our view. Lower gas prices have somewhat faded headline inflation, but we believe wages and services inflation are risks. Read More

Monetary Policy

Absent a material macro deterioration, we believe the Federal Reserve has reached sufficiently tight financial conditions and will keep the policy rate at 5.00%-5.25% in June. The futures market anticipates rate cuts, though bear outliers have likely skewed the mean lower than the mode. Meanwhile, a policy tightening bias remains for the ECB and BoE given slower improvements in wage and shelter inflation. Read More

Market Views

Mega-Cap Equities

MAGMA has outperformed the S&P 500 by 26pp YTD. We believe mega-cap companies can continue to outperform if growth remains far enough below potential to keep rates near their current levels. However, we believe they walk a narrow path: if growth re-accelerates (causing rates to rise) or a recession occurs (causing reductions in equity exposure), mega-cap tech names may find themselves vulnerable again. Read More

US Profit Margins

The worst margin declines are likely behind us now that price hikes have caught up with wage growth, in our view. Going forward, resilient revenues, slowing input cost inflation, and a weaker US dollar should help margins stabilize. In our view, meaningful margin expansion remains unlikely. Wage growth will likely remain elevated in the near term, and interest and effective tax rates are likely to inch higher, all of which inform our expectation for flat earnings growth in 2023. Read More

IG Credit

We remain neutral on global IG credit. Yields are attractive, corporate liquidity buffers appear resilient, and spreads historically tighten after hiking cycles with no recession. However, the potential yield pick-up on US IG credit over cash is essentially zero now, undercutting demand. Read More

Munis

We find that optimal municipal bond portfolios seeking maximum frequency of strong returns, minimum frequency of negative returns, or just maximum Sharpe ratio all may merit significant high yield weights. As a bonus, HY muni has historically defaulted less frequently than HY credit. Read More

Gold

Uncertainty is a key driver of gold performance. However, as banking sector concerns subside, we believe it may be difficult for gold to sustainably appreciate without rate cuts, which we do not expect in 2023. Read More

Good, Better, Best

Tax-loss harvesting can meaningfully increase bottom-line savings, though there are more ways than one to peel the orange. With volatility ever-changing in equity markets, we believe the most optimal loss-harvesting strategies are the nimblest, capitalizing on price swings as they arise. Selling losers to fund new positions on an annual basis may be good. Doing so monthly may be better. But in our view, tax-loss harvesting within the month, when pricing dislocations present themselves, is best.

SHORT AND SWEET

Equity selloffs may be painful, but they tend to be short-lived, with historical market drawdowns of 5%+ occurring in just five days, on median. Subsequent recoveries have been swift as well, with half of those losses being recouped in six days, on median. We believe that index-level drawdowns and rebounds taking place well within a 30-day window highlight the importance of a tax-advantaged SMA that can sell and replace securities intra-month.

THE MORE FREQUENT THE MERRIER

Investors may not capitalize on single stock volatility as often as they should, with those who tax-loss harvest only once a year missing out on greater opportunity to generate losses. Only 31% of S&P 500 stock prices, on average, have ended a year negative, while nearly half have closed a single trading day in the red. We believe tax-advantaged SMAs that can tax-loss harvest as frequently as losses arise provide more robust opportunity for tax alpha.

GIFT THAT KEEPS ON GIVING

Equity prices naturally trending higher than cost bases over time may appear as a risk to the viability of tax-advantaged SMAs in the long run, but we believe that concern is easily addressed. Small annual contributions, relative to the initial lump sum, can potentially extend loss-harvesting opportunities. Just $50k in additional capital contributions (or 5% of a $1mn initial investment) each year may double the losses realized after 25 years, keeping the tax savings flowing.

Top Section Notes: As of May 15, 2023. Light blue shading denotes consecutive peak-to-trough S&P 500 drawdowns of 5% or greater and subsequent 50% recoveries. Chart shows drawdown periods that were immediately followed by recoveries. The economic and market forecasts presented herein have been generated by Goldman Sachs Asset Management for informational purposes as of the date of this document. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. There is no guarantee that objectives will be met. Please see additional disclosures at the end of this document. Past performance does not guarantee future results, which may vary.

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March 2023

Crunch Time

The promising start to 2023 has benefitted from the reduction in acute European energy risk and strong Chinese economic momentum in reopening. Recent data trends have strengthened the global “soft landing” narrative, though good news remains a double-edged sword. Resilient growth may potentially invite additional rate hikes and threaten to elongate the economic adjustment that began last year. Consequently, the evolution of the growth-inflation mix and commensurate monetary responses remain our prevailing risk in 2023.

May 2023

Monthly Market Pulse: May

Our appetite for increasing duration in fixed income has grown as we near the end of the Fed’s rate hiking campaign. In our view, the risk asymmetry is appealing as higher yields on the long end may counterbalance further rate upside. As such, we believe the decision to add back duration is best addressed now through municipal bonds. History has rewarded early duration movers in the past six hiking cycles, with municipal bonds also outperforming US T-bills following historical peaks in policy rates.