US stocks remain the best investment amid 'treacherous waters': Goldman Sachs

At face value, talk of the US economy careening unceremoniously into a self-induced, albeit benign recession, hardly makes for an encouraging investment backdrop.

But with many of the world's economies also teetering on the edge of recession and both bonds and stocks falling in price, analysts within Goldman Sachs' Investment Strategy Group (ISG) are encouraging clients to remain invested in US equites.

Sharmin Mossavar-Rahmani, head of the ISG’s tactical asset allocation team believes the US could be a haven as economic conditions deteriorate.

Overweight US and underweight EM

Relative to market benchmarks, Mossavar-Rahmani argues that being overweight on US equities and underweight on emerging markets is the best road forward.

“US pre-eminence has repeatedly been a key theme for us… We still think US equities are the best place in terms of piloting through these treacherous waters.”

Amid an energy crisis, ISG forecasts suggest the likelihood of recession is increasing in many places, with the euro area and UK economies likely to go into reverse.

Interestingly, despite the recent massive selloff off in US equities, following the Federal Reserve’s third consecutive 0.75 basis point rate hike and heightened fear of recession, the risk of recession in the US is not yet ISG's base case for 2023.

By comparison, ISG reminds investors that the UK is quite possibly already in a technical recession.

Inflation may have peaked

If Mossavar-Rahmani is reading the economic tea leaves correctly, inflation – which hit a 41-year high in June at 9.1% - has already peaked.

Mossavar-Rahmani is witnessing encouraging signs that supply chains in particular have started to unravel.

Meantime, while other indicators are pointing to a decline in the number of job openings, she also notes that housing affordability has also dropped.

Private equity is a good place to be

Government data aside, an easing of shipping costs could also be pointing to relief on the US inflation front.

As a case in point, the World Container Index which tracks transport prices, has been trending lower since late 2021. While still around twice the normal, pre-pandemic price, year-on-year, the index is down an encouraging -29%.

Where there is opportunity for adding value, adds Mossavar-Rahmani is in the private equity space.

"It might not get as high returns as before, but relative to other areas to generate returns, it's a good place to be."

Time to re-enter the US share market

Investors should also note that if history is any proxy on what’s in store, the top of an inflation cycle has proved to be a great time to re-enter the share market.

According to data from the NYU Stern School of Business, after the December 1974 inflation peak of 12.2%, the S&P 500 gained about a 37% annual return, after posting around a -26% loss in the previous year.

Then there’s historical data which suggests that when inflation peaked in early 1980 at nearly 14%, the S&P rose again, gaining more than 30%.

However, histrionics aside, whether investors are confident enough to believe what former data would suggest, remains to be seen.