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In One Chart: Goldman Sachs sees these ‘prospective’ total returns across assets in 2023

Goldman Sachs Group’s investment strategy team expects stocks in the U.S. and Europe to beat other asset classes this year despite recession fears. 

“We expect US and Eurozone equities to be the best-performing asset classes in 2023, with total returns in local currency of about 13% in our base case scenario,” said Sharmin Mossavar-Rahmani, head of Goldman’s investment strategy group, and Brett Nelson, head of tactical asset allocation, in an outlook report. The group forecasts the MSCI All Country World Index may gain 12%.

“Such strong equity returns, if realized, will result in moderate-risk model portfolio returns of 9.0% for taxable clients and 9.8% for tax-exempt clients,” Mossavar-Rahmani and Nelson wrote in the Goldman investment strategy group outlook.

A chart in the report shows “prospective” total returns for 2023 across assets including the U.S. dollar, corporate and government debt, and equities globally. Goldman has projected the smallest returns for the U.S. dollar
DXY,
+0.25%

at 2%, while forecasting that 5% gains for U.S. cash will outperform more volatile assets like bank loans and municipal high-yield debt this year, the chart shows.

GOLDMAN SACHS INVESTEMENT STRATEGY GROUP OUTLOOK REPORT

For “cash,” Goldman used an index tracking U.S. T-Bills with 0-3-month maturities. The “moderate portfolio” seen in the chart consists of equities, fixed income and other asset classes, and is designed to track 8% volatility, according to the outlook report. 

In Goldman’s view, it is “not prudent to stay on the sidelines by being invested in cash for 30 months or longer and risk forgoing those attractive portfolio returns,” as highlighted in the chart above showing one-year and five-year gains expected across asset classes.

Meanwhile, the Federal Reserve risks overtightening its monetary policy through interest rate hikes aimed at taming high inflation, potentially creating a recession in the U.S.

“This is arguably the most widely anticipated recession in history and has already been preceded by one of the longest streaks of bearish investor sentiment on record,” Mossavar-Rahmani and Nelson wrote. “This year likely begins with recessions in two of the largest developed equity markets outside the US, the Eurozone and the UK.”

Last year, the relative performance of developed-market equities outside the U.S. was “a bright spot last year,” according to the report. 

Read: Slumping U.S. stock market lags these international ETFs as 2022 comes to an end

Traditional investment portfolios consisting of 60% stocks and 40% bonds were crushed last year as the Fed aggressively raised rates in its inflation battle that remains unfinished. 

“The worst of it, from our perspective, is behind us,” said Mossavar-Rahmani, during a media briefing on the 2023 outlook of Goldman’s investment strategy group. 

Tactically, Goldman has found opportunities in the tumult. 

“One of the most effective strategies in 2022 for taking advantage of increased volatility was using options to augment the returns of a fully invested portfolio,” the report says, citing “put and call option tactical tilts on the S&P 500.”

“While we do not have any such S&P 500 options as a tactical tilt in early 2023,” Goldman’s investment strategy group said, “we expect this to be an effective tactical asset allocation strategy this year, as spikes in volatility are likely given the uncertainty ahead with respect to the US economy and geopolitical tensions.”

The U.S. stock market has rallied this year, with the S&P 500
SPX,
+0.34%

up 3.7% through Thursday after plummeting 19.4% in 2022, according to FactSet data. 

During the media briefing, Nelson said he’s looking for opportunities in the S&P 500 using options to position for “an array of different outcomes” as opposed to “drilling down” on sectors. That’s because sector correlations become “pretty high” after a steep selloff in the stock market, he said.  

Read: ‘A very good test’: Watch this bank ETF as big banks kick off earnings season Friday

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