Within Sight of the Summit

Investment Strategy Group
Goldman Sachs Private Wealth Management
January 2014

US equities’ exceptional performance in 2013 has many investors wondering how to position equity allocations for the coming year.  An improving economy and the market’s initial positive reaction to the Federal Reserve’s tapering of asset purchases might argue for holding firm or even increasing allocations to equities.  Yet, the S&P 500’s robust 32% total return last year has fanned fears of a growing stock bubble, arguing for reduced allocations.

Given the far-reaching impact that US equities have on global financial markets and the US economy has on global growth, the most pressing question facing investors today is: Do current high equity valuations signify the summit?

We believe it is important to approach this question with a long-term investment horizon clearly in mind.  Viewed solely from the standpoint of current valuations, US equities now comprise the most expensive major equity market in the world.

However, as we make the case in this year’s Outlook, valuation alone is not an effective tool for underweighting equities.  In fact, our analysis shows that both the odds and the penalty of being wrong when underweighting equities are very high if valuation signals are the only guide.  Moreover, equity returns have historically been positive over the subsequent five years when starting from current valuations.

This analysis, combined with a favorable economic backdrop and higher margins sustained by structural shifts in the US economy, supports the current high valuations and leads us to recommend clients stay fully invested at their strategic allocation to US equities at this time.  Since non-US equities are less expensive than US equities and will benefit from an improving global growth backdrop, we recommend clients stay fully invested in non-US equities as well.

In this report, we review the outlook for global equities for the coming year, along with our views on global currencies, fixed income and commodities.  Following last year’s debut, we once again include our return expectations for all major asset classes for the next one and five years.

Of course, considering the number of possible risks that could trigger equity downdrafts this year, we must remain vigilant as our outlook is far from certain.  Still, we don’t see any evidence at the present of the typical triggers that have ended past bull markets in the US.

We invite you to read our views and recommendations for client portfolios in Outlook 2014: Within Sight of the Summit.

Goldman Sachs Private Wealth Management regularly publishes insight and commentary on investment and wealth management topics for our clients. To pursue a conversation on this topic, please contact a private wealth advisor.

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.