Goldman Sachs is the most bullish bank on Wall Street. That is notable in itself — for good or ill, the US investment bank’s views carry a good deal of weight with large investors and hedge funds.
But it is also useful to look at why some investors are reluctant to share in this enthusiasm just yet.
In its outlook for the year ahead — a tradition that banks have bravely stuck with despite the painfully short shelf life of the 2020 vintage — Goldman said it believed the US S&P 500 equity index would stretch as high as 4,300 by the end of next year. That would be a near 20 per cent rally from current levels.
The bank has stuck its neck out a little here with what it calls its “Roaring 20s Redux” view. The consensus among its competitors is closer to 3,800, just 5 per cent or so above where we are today. Some see barely any upside for the world’s pre-eminent barometer of investor sentiment in the coming 12 months, predicting instead that tech stocks will gradually surrender their leading spot in the index to hundreds of more cyclical names.
Still, it is easy to see where Goldman Sachs is coming from with its ebullient view. Indeed, the bank said in a later note that some of its clients balked at the 4,300 target, arguing it should be even higher.
Right now, those bulls are in control. On Tuesday, the Dow Jones Industrial Average crossed 30,000 for the first time — a number Donald Trump claimed was “sacred”. The more widely watched S&P, meanwhile, closed at a record high, led by energy and financials — sectors that are catching up at the end of a grim 2020. US small-cap stocks are enjoying their best month in at least two decades. European bank stocks have not yet shaken off the blow from March, but they are also staging their biggest comeback in decades.
In those pockets of the markets, the mood is almost giddy. News that former Fed chair Janet Yellen is likely to be the next US Treasury secretary, and baby steps towards Donald Trump formally conceding the US election to Joe Biden have helped this along, backed by central banks that have promised not to spoil the party. Together, those factors have “sent risk sentiment into overdrive”, said Kit Juckes, a macro strategist at Société Générale in London.
But it is news of potential vaccines to bring an end to the coronavirus pandemic that has significantly brightened the outlook, breaking 2020’s curse of seemingly endless uncertainty.
“A few weeks ago, it felt like this could go on for ever,” said Mike Bell, global market strategist at JPMorgan Asset Management. “It felt like it could be another 100 years. The vaccines are a game-changer. When the facts change, you change your mind.”
At the very least, 2021 simply cannot be worse. Barring a meteor strike, it is hard to imagine that the coming year could deliver the same kind of disruption.
But some fund managers are still not swept up in the euphoria. In addition to the pushback from Goldman Sachs’ clients arguing the bank was being too cautious, some felt it was too bullish, unnerved by the potential for rising inflation expectations to push up government bond yields and in turn chip away at equities.
It is hard to discern signals from bonds, which central banks are buying in huge volumes. But David Riley, chief investment strategist at BlueBay Asset Management in London — himself an optimist for next year — pointed to the lack of a forceful drop in price of US government bond prices since the vaccine news broke as a clue that big investors may be holding fire from the “back to normal life” trade for now. Ten and 30-year US yields have not meaningfully picked up.
“The market does not have full conviction yet, or we would have higher long-term yields,” Mr Riley said. “Either you think bond markets behave differently now, or you are trying to have your cake and eat it. You think there’s a global recovery back to pre-Covid levels, you think unemployment goes back to where it was before, but you still think we have ultra-low interest rates — the perfect cocktail.”
This is where the real debate for 2021 lies. If vaccines really are the silver bullet to end the pandemic crisis quickly, the danger (a nice problem to have, to be clear) is that support from the bond market ebbs away. Some may also call into question the need for further monetary and fiscal support.
This is not top of the agenda today. But investors worry that if the vaccines really do take us back to life as we knew it in 2019, the potential for a return of long-lost inflation and higher bond yields will hold back stock markets’ animal spirits.