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Goldman's Global Equity Chief Says Investors Shouldn’t Worry Even Though He Sees Signs Of A Market Top

Goldman's Global Equity Chief Says Investors Shouldn’t Worry Even Though He Sees Signs Of A Market Top
After seeing warning signals of a market peak, Goldman Sachs has sought to reassure investors.
In order to gauge when a market may have topped out, the investment bank has built a "Bear Market Risk Indicator".
While chief global equity strategist Peter Oppenheimer said on Thursday that long-investors should be reassured, the indicator currently points to a "high risk" of a bear market according to the Goldman's September strategy paper.
"First, it doesn't make that much sense to try to identify the absolute peak of the market. Partly because if you sell a little bit early then you are usually in the same position as someone who waits for a bear market to start," said Oppenheimer.
"The second point is when you get a bear market it doesn't start with a huge collapse in one direction. You tend to get a lot of volatility around the peak. And nearly always a correction is followed by a very sharp bounce so typically you get another chance to reassess," he added.
Structural bear markets, triggered by structural imbalances and financial bubbles, event-driven bear markets (such as a war or oil price shock) and the cyclical bear markets, which typically relate to the economic cycle are the three categories that Goldman splits bear markets into, which have been based on 200 years of U.S. data, Oppenheimer said.
The Bear Market Risk Indicator was being stretched disproportionately by the valuation input, which was itself being inflated by loose monetary policy and low bond yields, even while the Bear Market Risk Indicator was currently "high" at 67 percent, Goldman's analysis noted.
There were good reasons to "worry less than in the past" as financial imbalances and inflation were both currently low, the bank added.
However, any correction could be sharp as the era of easy money has pushed investors into riskier assets, Oppenheimer also conceded.
"In a sense, what we have seen over the last eight years is an environment of disinflation in the real economy but significant inflation in financial assets," he said.
"Much of that is reflective of near-zero rates and QE (quantitative easing) and it has pushed investors up the risk curve, paying a lot more for assets. Valuation increases have accounted for much of the returns in financial assets, so if there is a shock it is likely that the adjustment could be more rapid, and if not, deeper."

Christopher J. Mitchell

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