Traders work on the floor of the New York Stock Exchange during morning trading on August 23, 2024.
Angela Weiss | AFP |
The rapid return of market confidence after a dramatic global sell-off in risky assets should be a cause for concern, says the head of asset allocation research at Goldman Sachs.
In an interview with CNBC's “Squawk Box Europe” on Wednesday, Goldman's Christian Mueller-Glissmann said investors could view the collapse in stock prices in early August as a kind of “warning shot.”
Stock markets started the month under heavy pressure as concerns about a potential recession in the U.S. and the unwinding of popular carry trades tied to the Japanese yen pulled stocks from record highs. The S&P 500 lost 3% on August 5, its biggest one-day loss since 2022.
Since then, however, expectations of an imminent interest rate cut by the Federal Reserve and improving U.S. economic data have pushed stock prices higher. The S&P 500 has gained 8 percent since August 5, while the Dow Jones Industrial Average has gained more than 6 percent.
“Before that, there was about a month or two where positioning and sentiment were at the upper end of the range. People were optimistic,” Mueller-Glissmann said.
“We were actually worried about a slight correction because while we had optimistic positioning, the momentum at the macroeconomic level was a little weaker. Before that, there were about a month and a half of negative macroeconomic surprises in the US, and in fact the macroeconomic surprises in Europe and China also started to turn negative,” he added.
“What is worrying now is how quickly the market has returned to where we were before. We can talk about that, but it certainly shows that unfortunately we are almost back to the same problem as a month ago.”
“A massive technical overreaction”
Market participants are currently awaiting the release of a key US inflation report to get a better picture of the state of the world's largest economy. US personal consumption expenditures data, the Federal Reserve's preferred inflation indicator, are due to be released on Friday.
Earlier, Fed Chairman Jerome Powell said late last week that “it is time to adjust policy,” which increased expectations of a rate cut at the central bank's meeting on September 18. Powell declined to provide precise details on the timing or extent of the cut.
Pedestrians walk along Wall Street near the New York Stock Exchange (NYSE) in New York, U.S., on Tuesday, August 27, 2024.
Bloomberg | Bloomberg |
When asked how risk appetite would evolve in the coming months, Mueller-Glissmann replied: “What happened on August 5th and around that time was obviously a huge technical overreaction… so that was a buying opportunity.”
He said the current challenge for market participants is that stocks and risky assets have “fully recovered” their losses and returned to their previous levels.
“What I find quite interesting is that risk appetite is not yet back to previous levels and that there has actually not been a sell-off in safe assets – bonds, gold, yen, Swiss franc,” said Müller-Glissmann.
“The good news, in my opinion, is that while the S&P is back to where it was before, there is no sign of complacency. We are no longer at the same extremely optimistic level and we do not have a similar positioning.”
What’s next for investors?
Mueller-Glissmann, who has previously advocated a 60/40 portfolio, noted that a balanced portfolio has performed “phenomenally” during a turbulent month in the markets, but warned that the recent buffer provided by bond markets may not be quite as reliable in the near future.
“If you think about it, the bond market has absorbed most of the decline. If you look at the 60/40 portfolio, that was a blip. The maximum decline was, I think, 2% for the balanced US or European portfolio. In other words, the bond market has balanced out the equity, as we had hoped,” Müller-Glissmann said.
“I would say, given that you don't have that much of a buffer from bonds right now, tactically you might want to be a little more cautious with your risk exposure, especially after this run,” he continued.
“There are different ways to deal with it. Either you cut it a little bit … or you create alternative diversifiers, which can be liquid alternatives, options overlays or something similar.”
— CNBC's Lisa Kailai Han and Brian Evans contributed to this report.
