Half Full

Investment Strategy Group
Goldman Sachs Private Wealth Management
January 2017



Two observers can draw very different conclusions about the same set of facts. In recent years, a growing number of market watchers have concluded that the current economic expansion and bull market for equities won’t outlive the year. Both have already surpassed expectations in this respect. After all, the economic recovery is the fourth-longest in the post-WWII period, and the bull market for US equities has outlasted all other bull markets but one in length over the same time. The longer both trends endure, the probability of their demise goes up, and sooner or later, the naysayers will be proven right. But 2017 will likely keep them waiting.

As our 2017 Outlook covers at length, we do not believe the coming year will bring an end to either run of positive performance. Despite greater uncertainties, including those tied to a new US administration, the policy backdrop in the US will likely prove particularly favorable for the economy, with looser fiscal policy, still easy monetary policy and a lighter regulatory burden. With the first two of these themes repeated in major economies elsewhere, we expect global growth to improve modestly as well. As these factors diminish the probability of recession in 2017, they also support the case for clients remaining invested in global equities at their strategic allocation, at least for the time being. While we believe US equity gains are likely to be modest, the comparable returns of most other investment alternatives—notably cash and bonds—are unfavorable. And, as last year demonstrated, US equities often surprise to the upside.

In aggregate, we maintain our view that the glass is half-full when it comes to the US economy and US equities, keeping with the overarching trend of US preeminence that has been the focus of our Outlook publications for eight years running. In the first section of this year’s Outlook, we examine six theories—secular stagnation, mismeasurement of GDP statistics, and a “hangover” from the financial crisis, among them—as to why this recovery has been particularly slow and prone to pessimistic predictions. Similarly, we take a hard look at the expanding number of risks that could derail the last innings of this recovery and bull market. We conclude the section with a review of our return expectations for the next one and five years, along with our tactical tilt recommendations. In the final two sections of the Outlook we provide our economic and investment outlook for major developed and emerging markets.

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The Investment Strategy Group is a part of the Investment Management Division of Goldman Sachs and is not a part of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed by the Investment Strategy Group may differ from the views and opinions expressed by GIR or other departments or divisions of Goldman Sachs.