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4 Challenges Investors Are Facing and How to Think About Them

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Marcus by Goldman Sachs is excited to share this insight from our friends at Goldman Sachs Asset Management Strategic Advisory Solutions. You can read the original version of this article here.

It’s not news that markets have been hitting record highs in the past year. Consider this: From March 31, 2020 to March 31, 2021, the S&P 500 delivered its 3rd best 12-month period following a sizable correction. The opportunity cost of not being invested is high, but there are still four things that investors may want to keep an eye on: taxes, rates, inflation and stock prices. In short, they’re all inching up. Here’s what investors should know about these rising fiscal metrics and some strategies that could potentially help solidify your portfolio in today’s market environment. 

1. Higher Taxes 

Recently there’s been massive fiscal spending, record-high public debt levels and relatively low tax rates. Given all this, our colleagues at Goldman Sachs Asset Management (GSAM) think that it’s more likely that taxes will increase (rather than decrease) over the next decade for both companies and high earners. 

For individual investors, the market impact around tax hikes has historically been short-lived. But if taxes are on your mind, GSAM analysts suggest thinking about strategies like tax-loss harvesting in equity portfolios, tax-advantaged income in municipal bonds or investing in ETFs. As always, it’s a good idea to check in with a tax professional for more detail.

2. Higher Rates

GSAM analysts expect the 10-year yield to rise to 2.1% by year-end 2022. In the short-term, climbing rates could slow down growth for long duration assets, but boost opportunities for assets to outperform benchmarks. Higher yields can still be good for stocks, as long as rates rise gradually and do so alongside better growth.

Markets have been hitting record highs in the past year but investors may want to keep an eye on things.

When rates are higher, investors may consider short-duration fixed-income investments, which reduce rate sensitivity. You might also think about value-style and down-in cap equities – historically, these types of stocks have done well during periods of higher rates. 

3. Higher Inflation 

Inflation has been a hot topic in the news. (Need a refresher on this term? Check out our inflation primer.) Covid-19 led to some temporary supply-chain disruptions, but even as things start to normalize, the Core PCE (the Price Consumer Expenditures Index, which excludes food and energy prices to gauge inflation) is expected to remain near 2%.

If inflation continues to go up, there’s strong potential in real estate and commodity markets. GSAM analysts also note that equities have also historically done well in periods of higher inflation, ultimately outperforming inflation 100% of the time when held for 15 years or more. Equities with a high beta (a measure of a stock’s volatility) to the economic recovery and to commodity prices may do especially well, including those in emerging markets.

4. Higher Stock Prices

Today’s high stock prices may have investors worried about an impeding correction, but they can also be justified by the macro recovery and policy support. GSAM analysts don’t expect assets prices to jump around sharply, as long as recessionary factors don’t come back into the picture. And they’ve found strong data to support the fact that equities can stay expensive for extended periods of time, particularly with relatively low rates and high corporate profitability. 

To address price risk in US equity markets, our colleagues at GSAM think investors could consider revisiting their core fixed income investments. And they suggest that investors may also want to look abroad for equity opportunities at more attractive prices. For example, 2021 emerging market equities are trading at a 40% valuation discount. International developed markets are also catching up in their recovery. Being selective among all of these markets may help investors identify pockets of relative value.

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