All assets disappoint
Goldman Sachs (GS) says that this year has proven to be an average one for major asset classes. Neither equities nor bonds (AGG) performed particularly well. As of December 17, the major US markets are trading in the red for the year. The S&P 500 (SPY) and the Dow Jones Industrial Average Index (DIA) have lost 4.3% and 4.4%, respectively, year-to-date.
Cash could be the king
Under such a scenario where all major asset classes have disappointed, GS expects more of the same except for cash. As reported by Barron’s, Goldman Sachs analysts led by David Kostin, said, “We forecast S&P 500 will generate a modest single-digit absolute return in 2019. The risk-adjusted return will be less than half the long-term average. Cash will represent a competitive asset class to stocks for the first time in many years.”
Like most market participants, GS also believes that since the bull market in the US (VTI) is not overstretched, it might eventually end. As we had highlighted in Is Down the Only Way to Go for US Equity Markets, the momentum in equities seems to be stalling.
According to FactSet, the earnings growth is expected to cool off from 23% this year to 10.3% in 2019 and 9.5% in 2020. Also, the S&P 500’s (SPY) net profit margin reached 12.0% in Q3 2018. The margin expanded by 1.6 percentage points year-over-year and marked a record since FactSet started recording this data in 2008. As pressure ramps up with higher raw material, energy, and labor costs and the impact of tariffs, margins are expected to contract, especially as the benefit of the tax impact could wear off going into 2019.
In addition to these concerns, GS believes that when adjusted for risk associated with owning equities, cash is a better option.