The S&P 500 has rebounded 7% since Oct. 12 amid speculation the Federal Reserve will soon lessen its interest-rate increases and then end them next year.
Does that mean the stock market has bottomed from its 25% drop between the beginning of the year and Oct. 12?
No, say Goldman Sachs research executives.
“The broader case for U.S. equities doesn’t look very strong, and the normal conditions for an equity trough are not clearly visible yet,” the executives said in a commentary.
“Equities haven’t fully reflected the latest rise in real yields, and any significant easing in financial conditions through higher equities will likely be offset by policy in the end.”
In other words, higher interest rates will ultimately limit gains by stocks.
Equity Returns Trail Cash
“U.S. equity valuations do not yet offer a historically large premium to the real returns on offer from bonds and cash, particularly given significant downside if a proper recession occurs or geopolitical risks in Ukraine or elsewhere intensify,” the research executives said.
To be sure, it’s unclear how one compares stock valuations to fixed-income returns. But real returns for cash so far this year have far outstripped stock returns. The Fidelity Money Market Fund has returned 0.8% year to date, far better than the 20% decline for the S&P 500.
The research executives don’t think the tightening of financial conditions is over. Those conditions include the dollar’s valuation, corporate-bond spreads over Treasurys, stock-market levels and interest rates.
“Because we have not decisively met either of the two conditions -- convincing inflation relief or a shift towards outright recession -- that we think are necessary for a sustained shift [in Fed policy], we do not think the pressure for tighter financial conditions is at an end,” the research executives said.
Investors Might Look at Defensive Stocks
Meanwhile, separate from Goldman’s research, given the stock market’s volatility and the economy’s sluggishness, you might want to consider defensive stocks.
These stocks, in sectors such as consumer staples and utilities, tend to outperform the overall market when it’s falling and the economy is struggling. That’s because demand remains strong in these areas even during economic downturns.
The economy contracted 1.6% in the first quarter and 0.6% in the second quarter.
Looking at consumer defensive stocks, on Oct. 24, Morningstar cited two of them that have strong fundamentals. Its analysts also think the duo are greatly undervalued at a time when most consumer-defensive stocks are less undervalued than stocks in other sectors.
Morningstar chose Boston Beer (SAM) and Hain Celestial Group (HAIN).
Boston Beer is a leader in U.S. high-end malt beverages, including craft beer, hard cider, and hard seltzer. Samuel Adams is one of its brands.
Hain Celestial makes natural food and personal-care products. Its brands include Celestial Seasonings.
