U.S. stocks are 'a long way away from being in bubble territory': Goldman's Mossavar-Rahmani
Goldman Sachs' Sharmin Mossavar-Rahmani, head of the bank's Investment Strategy Group and CIO of its Wealth Management division, says U.S. equity markets are a "long way away from being in bubble territory."
"So how should one actually look at U.S. equities? First and foremost, we show clients that when you're in periods of low and stable inflation, which we have been in the United States since April of 1996, market valuations are generally higher, and intuitively that makes sense. If you have a lot more visibility into the stability of a company's earnings, investors will pay a higher price for that. If you have lower interest rates because you have low and stable inflation, then clients will pay a higher price for that earnings yield that is available through equities. But we need to look at valuations today, relative to the averages since April of 1996. So equities are expensive, but not so significantly overvalued," Mossavar-Rahmani told Yahoo Finance Live on Friday.
When looking at bubbles, the bank's Investment Strategy Group uses a metric called the "explosive price behavior." That metric typically has to reach 90% to 100% for the group to believe the market is in a bubble. Presently, that metric is at 26%, according to Mossavar-Rahmani.
She acknowledged that the market is "somewhat overvalued," but when looking at the earnings trajectory in 2021 relative to a year ago, there's going to be "a very nice earnings recovery" with above-average growth in the U.S. along with the supportive fiscal or monetary policy.
"So that's actually a good combination for an equity market that our base cases is up 8% with some probability that it could be up in the mid-teens. So we don't think it's in a bubble," Mossavar-Rahmani said.
What's more, Mossavar-Rahmani said the group tells its clients that "valuation alone is not a great signal for going underweight equities."
Mossavar-Rahmani's private wealth management advisers have reiterated the same message to clients since the global financial crisis of staying invested in U.S. equities, pointing out that the "hurdle to go underweight should be very high for investors."
"The message to our clients is that that has been our investment theme of U.S. preeminence and staying invested since March of 2009," Sharmin Mossavar-Rahmani said.
This month, the investment strategy group published its 116-page note titled "U.S. Resilient," an annual outlook sent to the firm's wealth management clients. In the note, co-authored by Brett Nelson, the group's head of tactical asset allocation, Goldman pointed out that it's recommended staying invested in U.S. stocks on 98 separate occasions since March 2009, including when the S&P 500 (^GSPC) declined 19.4% between September and December 2018 and more recently during its 33.8% drop between Feb. 19 and March 23 due to the pandemic. The same advice was given during market rallies, too.
"[Our] recommendation to stay invested with a preponderance of assets in U.S. assets in the S&P 500 in terms of weights relative to, for example, emerging markets or other developed economies, is that message, and we keep on saying that that is still valid," Mossavar-Rahmani added.
Goldman noted that U.S. equities had gained 609%, or 18% annualized, since March 2009, far outpacing developed markets outside the U.S. and emerging markets' equities. U.S. stocks have also outperformed other assets such as treasuries, high yield securities, gold, oil, and alternative assets such as hedge funds and private equity.
'US preeminence is still valid'
Mossavar-Rahmani said the firm's clients ask if those two themes of U.S. preeminence and staying invested overweight U.S. equities should still dominate their investments.
"[We] want to very strongly reiterate that, yes, our investment recommendation to stay invested is still totally valid. It's based on fundamental earnings. And U.S. preeminence is still valid, and there is nobody that's even going to come close to challenging the U.S. and its preeminence. And so again, the preponderance of assets in the United States," Mossavar-Rahmani added.
Elsewhere, the recent run-up in Bitcoin (BTC-USD) has garnered the attention of the firm's clients over the last several months, including this week when it hit record highs after Tesla (TSLA) revealed it bought $1.5 billion worth of the digital currency and that it plans to start accepting bitcoin as payment in the future.
"Our view is that when you're looking at strategic asset allocation for a client, and we customize that for every client, it has to be thinking of the long-term and have core assets. And if you think about the S&P 500, increasing seven-fold since March of '09, that's a core asset that one could invest in with a significant portion of one's assets. If people want to be more speculative and trade, they can certainly do that. We can't say clients shouldn't be thinking about that. But for us to think about it as a core asset in a portfolio with a significant role to play, we have to be certain about the risk characteristics, we have to have confidence in cash flow generation, we have to cut confidence in an asset class being a deflation hedge, like bonds, being a great inflation hedge, like in fact, the S&P 500," Mossavar-Rahmani said.
She pointed out that the S&P 500 "is probably one of the best long term inflation hedges out there."
"[When] we think about long term returns for the S&P 500 for clients who have a long investment horizon, and in withstand some interim volatility, it's probably the best long term asset to own. And so that's how we try to help clients think about it," she said.
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.
