Goldman says that 2023 will see flat returns

• Goldman Sachs claims that the stock market is still far from bottom despite a temporary rally earlier this month. 
• The bank said Monday that investors should be less exposed to bonds and stocks in the short-term. 
• An analyst from Goldman discussed why investors may want more cash and credit right now. 

Stocks enjoyed a strong relief rally in November following the October inflation report showing prices cooling. But the market has not bottomed yet and investors should be prepared to receive flat returns through 2023, Goldman Sachs wrote in a Monday note. 

Markets celebrated signs that the Federal Reserve could soon reduce interest rate hikes after inflation reached its highest point in 40 years. However, cooling prices could allow for more moderate policy. The S&P 500 is up 3.2%, while the Dow Jones Industrial Average has increased 4.52% in the past month. 

Christian Mueller-Glissmann from Goldman Sachs says the party is not going to last. He also said that there are many conditions that need to be met for a market to bottom. 

Mueller-Glissmann wrote Monday that markets cannot trough without depressed valuations. He said that investors need to see either a peak or a trough of economic activity. “The growth/inflation mix remains unfavorable – inflation is likely to normalize but global growth is slowing and central banks are still tightening, albeit at a slower pace.”

Overvalued stocks and uncertain economic conditions mean investors need to consider putting more money into cash and credit. They should also be less exposed to stocks and bonds as stocks continue to fall. Both fixed-income and equity securities could face “further hurdles” due to possible rate hikes or uncertain economic growth. However, the investment bank expects that the US Dollar will hit its peak in 2023.

Muelle-Glissman said: “The valuation start point has improved, but risky asset values are well above recessionary level and earnings are skewed towards the downside next year. And the recent relief rally on peak inflation/hawkishness hopes has reduced risk premia on cyclical assets again.”

Because they are less closely correlated with equities, bonds could be used as a decent diversification tool in the future. However, bonds won’t be able “reliable buffer” for stocks if central banks keep tightening. 

Mueller-Glissmann said that because of low expected returns, and limited diversification benefits from traditional investments, there is a strong case for greater allocations to other assets and a focus on alpha instead of beta.