As the S&P 500 Index surges to an all-time high and bonds rally slightly following Brexit, Goldman Sachs says it is time to be afraid, very afraid.
The prices of bonds and equities seem to be higher than they should be, and may soon tumble, says the Wall Street firm’s strategists.
The reason: Brexit. A team of Goldman analysts led by Christian Mueller-Glissmann wrote in a note to clients that markets have treated the referendum as a largely localized economic event that is likely to cause central banks to ease further. But if the central banks don’t lower interest rates, or Brexit ends up having a broader economic impact on the global economy then there could be trouble.
“Bonds could sell off sharply as a result of central bank disappointment, positive inflation and data surprises and/or illiquidity, which would likely drive weakness in equities and other risky assets, at least initially,” the team wrote. “Equities could sell off owing to negative growth surprises and with yields at all-time lows, bonds are unlikely to be good hedges.”
“We remain defensive in our asset allocation and believe the positioning-driven recovery of risky assets, in particular for equities, post Brexit is likely to fade,” the team wrote.
That also suggests that a basket of currencies is the best way to go for now, Goldman wrote.
Goldman has been resolutely negative on the market this year, predicting way back in November that stocks would go no where in 2016. Right now, that looks a little more negative than was warranted. The stock market is now up slightly up nearly 5% this year.
Nonetheless, the bank reiterated its “neutral” rating on equities, saying the market is likely to go no where during the next 12 months. But don’t run to the bond market for safety. Goldman said bonds are likely to do even worse, falling in price and producing a negative value in the next year. Under your mattress is starting look better and better.
