The economic soft landing that stock bulls are hoping for is unlikely given persistently higher inflation and risks of a global economic slowdown, according to Goldman Sachs Group Inc.’s Peter Oppenheimer.
(Bloomberg) — The economic soft landing that stock bulls are hoping for is unlikely given persistently higher inflation and risks of a global economic slowdown, according to Goldman Sachs Group Inc.’s Peter Oppenheimer.
The chief global equity strategist told Bloomberg TV on Friday that even though major equity markets have tumbled year-to-date, they need to fall more in order to price in inflation remaining higher for longer and the global downside risks to growth in the US, China, and Europe. While some market patterns, like the outperformance of defensive stocks over cyclicals, suggest that the market is expecting an economic slowdown, Oppenheimer is not convinced the broad equity market is in touch with reality.
“At this stage it still looks to be pricing something of a soft landing,” he told Bloomberg’s Alix Steel and Tom MacKenzie. “I think the market will get to pricing more recession risk before we get a genuine turnaround.”
The market got close to accurately pricing in recession risk right before the summer stock rally that began in mid-June, he said. Hopes of a policy pivot from the Federal Reserve fueled that rally, but the optimism has mostly faded after Jerome Powell delivered a hawkish speech at the Jackson Hole meeting last week.
On Friday, the S&P 500 pared gains after jumping higher following the August jobs report that fueled optimism that the Fed’s aggressive tightening may already be working its way through the economy. The unemployment rate unexpectedly rose to a six-month high of 3.7%, the first increase since January, according to the Labor Department.
To Oppenheimer, the jobs data is not something for stock bulls to cheer over. Continued strength in the labor market will lead to higher inflation expectations and encourage the US central bank to be “persistent” on its path of raising interest rates and restoring price stability, he said.
On the positive side, the strategist doesn’t expect a deep recession, given that private sector balance sheets are strong. He also doesn’t think absolute levels need to “fall that much.” Oppenheimer expects to see lower returns and higher volatility until there’s more clarity on recession risk.
“To get to a bottom in the market, I think valuations have probably got to be lower and more recessionary risk at least has to be priced relative to what we’ve seen, and alongside that probably higher terminal rates,” he said.
EXPLAINER: Why Fed Aim Is Now a ‘Growth Recession,’ a Not-Soft Landing: QuickTake
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