Goldman’s Bold Prediction…
Last week I warned investors the market is heading for a correction. In my humble opinion, skyrocketing gas prices, slowing corporate earnings growth, and the increasing likelihood of a recession in Europe are making it tough for the early 2012 market rally to sustain itself.
And as if right on cue, the market stumbled last week for the first time in a long while.
The Dow Jones Industrials dropped by 1.2%, the index’s worst week since mid-December. And the S&P 500 registered its worst week of the year, giving up 0.5%. The tech-heavy Nasdaq was the only major market index to post a gain for the week, edging up a slight 0.4%.
Is it the beginning of a deeper market correction?
Only time will tell of course, but the market’s strong start to 2012 is starting to show signs of running out of steam.
That’s why I was surprised to see this bold prediction from Goldman Sachs.
Last Wednesday, the iconic Wall Street firm issued a report claiming a once-in-a-lifetime opportunity exists right now for long-term investors to switch out of bonds and move into stocks.
A couple of Goldman strategists say the market is undervalued. They argue the bursting of the tech stock bubble in the early 2000s and the worst financial crisis since the Great Depression have eroded investor confidence in stocks.
But they believe “the next decade is likely to be a peak period for global growth.” And they go on to say, “if future economic growth is, indeed, stronger, then again the lower expectations currently priced into equity markets is likely to prove too pessimistic.”
That may well be true, but we’ve heard this kind of rhetoric before.
Remember the “new paradigm” of the late 1990s?
This argument formed the basis of a wildly optimistic market forecast at a time when stocks were already at nosebleed valuations. Many so-called Wall Street experts claimed tech stocks were undervalued. The reason… advancements in technology had created a new paradigm that would keep driving 20% to 30% annual earnings growth at these market darlings forever.
Of course, we all know how well that prediction worked out…
The truth is technology stock valuations were highly inflated. And when the tech stock bubble burst, most ordinary investors were left holding the bag (a very expensive bag I might add).
You may recall the market lost a whopping $5 trillion in value from 2000 through 2002.
Now, I’m not saying Goldman’s prediction is necessarily flawed or wrong. But I do wonder about the timing of this highly optimistic forecast.
It’s not like the market’s trading at depressed levels. In fact, all three of the major market indices have more than doubled off the March 2009 financial crisis lows.
It certainly sounds to me like Goldman is trying their hardest to convince ordinary investors to get off the sidelines.
It’s a well known fact the current three year bull market has been fueled mostly by institutional investors. The vast majority of individual investors have been content to preserve what little money they have left following the late 2008 market crash.
The question in my mind is…
Does Goldman really believe we’re headed for a decade of “peak global growth”? Or do they just want to draw in the trillions of dollars sitting on the sidelines in an effort to keep the market rally going a little while longer.
Remember, we do have a presidential election coming up in the fall.
It’s a fair question. Especially, when you take into account the beating ordinary investors have taken after following similar bold predictions in the past.
Now, don’t get me wrong…
I don’t believe you should shun the stock market altogether. After all, stocks are the only way most of us can build the wealth we need to achieve our long-term financial goals.
I’m just cautioning you from going all-in at current market levels. Prudent investors know you have to take these kind of long-term, pie in the sky forecasts with a large grain of salt.
Category: Stocks
