Market Pulse

September 12, 2022

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Marcus is excited to share this insight from our colleagues at Goldman Sachs Asset Management’s Strategic Advisory Solutions, highlighting some of the latest issues and trends in the financial markets.

September 2022

If you’re wondering where the economy and markets may be heading these days, here are some things to know:

Jobs are still plentiful, but for how long? The hot US labor market is slowing down as companies re-evaluate hiring. Some are cutting open jobs; some are hitting the pause button. But job growth right now is still twice the pre-pandemic rate. Our Global Investment Research team estimates we still have 5.6 million more open jobs than available workers - a hearty 3.6 million above the level that could help us control wage growth and reach the Fed’s inflation target.

What’s it going to cost us? After a year’s worth of negotiations, President Biden recently signed the Inflation Reduction Act (IRA) – a significant climate, health care and tax bill – into law. As with all spending bills, the question becomes how much it could slow the economy if people had to pay more in taxes. Our Research colleagues estimate that this bill’s net fiscal drag on gross domestic product (GDP) will be less than 0.1% in each of the next few years, with corporate tax increases and cost savings offsetting energy investments in the IRA.

Hey, bears! The bull may be down but not out. Our Research colleagues revised their growth predictions downward for 2023 S&P 500 earnings, due to slowing GDP growth, new corporate taxes and maybe some tightening of profit margins. So, investors may not make the returns in the stock market that made recent years so profitable. But down is not out and there are still opportunities. The S&P 500 has now regained half of what it lost between its peak and its June low. Plus history has a hopeful message: In the 12 months after past trend reversals, the S&P 500 has delivered a positive 19% return on average.

Yield signs. Fed guidance (hints on their next moves) will likely skew US Treasury yields higher. While slowing growth in the economy could keep the yield curve flat. A flat yield curve, when short-term and long-term rates are very close, tends to happen in times of transition, like now, when the Fed is increasing its short-term rate target.

This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation to buy or sell securities, or of an account type, securities transaction, or investment strategy. This article was prepared by and approved by Marcus by Goldman Sachs®, but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC are or any of their affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

July Market Pulse

The good, the bad and the “could be worse.” We are at greater risk of recession than earlier this year, but our Asset Management colleagues don’t believe it’s inevitable. Yes, commodity prices, inflation expectations and housing costs have continued to rise. But we’re also seeing signs that economic activity is cooling down, labor demand is moderating and supply chains are improving. If we do get a recession, solid household wealth and an absence of financial bubbles may keep it relatively short and mild.

Are we there yet? It’s likely we’ve reached the peak of inflation. Inflation on goods should be moderating as supply chains improve. Service cost increases, however, may keep fueling overall inflation, keeping long-term inflation concerns top of mind.

What’s up, Fed? We expect the Fed to hike by 0.75% again in July – with the Fed funds rate landing at 3.25-3.50% by year end. (Compared to 1.58%, as of July 6.) But with the Fed determined to fight inflation, there’s some risk of the rate going higher.

Barely a bear. The S&P 500 dipped into bear territory last month. Stock prices are behaving the way they historically do when a shallow recessionary pullback is potentially in sight. Prices may grind higher over the next year but the near-term ride could be rocky.

Not all bears are grizzlies. Markets may continue to search for the bottom, but our Asset Management colleagues find comfort in knowing that today’s conditions aren’t quite like those of past deep recessions (like the 70s)that featured high inflation but also elements of financial overheating that we aren’t seeing today.

May Market Pulse

A real pain at the pump. The prices US consumers are paying for energy have jumped 186% above pre-Covid-19 levels. Demand is slowing down, as some of us may be rethinking our driving habits.

We still have clogs in the pipes. April saw signs of improvement in the supply chain congestion. But some problems are still with us, continuing to raise prices. For example, about 1.25 million tons of grains and oilseeds are stuck on vessels blocked in Ukrainian seaports.

What could make high inflation stubborn? Oil prices and continuing supply issues may be part of today’s inflation problem. But truly persistent inflation would be driven by wage growth and inflation expectations.

How could expectations potentially affect inflation?

Think about it this way. Expectations could have an impact if people act on them. If businesses expect higher inflation, they may raise their prices, knowing consumers expect and therefore are more likely to accept and pay higher prices.

If workers expect higher inflation, they may ask for larger wage increases. The combination of businesses, workers and consumers acting on their expectations of soaring prices may cause high inflation to stick around.

Playing quarterback. After this month’s 50 basis point (0.50%) rate hike by the Fed (Federal Reserve), two others of the same scale are expected to follow in June and July.

Sturm und Drang. World events and nervousness about Fed rate hikes have made the stock market a pretty volatile place. More market turbulence may come in the Fed’s quest to tighten financial conditions and tame inflation. But it might not affect every stock – some companies’ first quarter earnings were welcome shots of sunshine through the clouds. Our colleagues at Goldman Sachs Asset Management say that financially sound companies with durable growth may be in a position to weather the storm.

Recession: Signal or Noise?

The Fed is dealing with tight labor markets and stubborn inflation. Some investors worry that this might invite more aggressive actions from the Fed, which could lead us into recession. But potential buffers against an economic slowdown remain in place - including abundant personal wealth, high labor demand and strong spending power.

Our Goldman Sachs Global Investment Research colleagues are still forecasting US growth of 2.6% in 2022.