“This is just a lot of noise. The main signal and the main message that we’re giving our clients is to stay invested. We have good economic growth and a very favorable earnings outlook,”. This is what Goldman Sachs Wealth Management’s CIO, Sharmin Mossavar-Rahmani, has to say in a CNBC interview, about investors who are in fear, thinking that the market today might be in a bubble trouble.
According to Rahmani, in terms of the specifics of the current volatility of the equity markets today, on average the volatility is around 15%, and since the pandemic, it has been around 20%. “Seeing this type of market move is inevitable. In fact, if we go back and look at the post-global financial crisis period, we’ve had episodes of the market down 5% at least 95% of the time, while episodes down 10% happen 75% of the time.”. She said that every investor must take a look at this kind of market move to be able to recognize what’s happening today is just noise and there is no threat currently that the market may collapse fundamentally speaking.
Talking about equity valuations, Rahmani noted that there is a couple of different perspectives they bring to bear. “First and foremost, we look at a series of metrics but we look at them not just compared to long-term averages but one actually has to look at them in the context of a period of low and stable inflation.”, she mentioned while saying that the environment she’s been since April 1996 was low and stable inflation. “We actually are not as expensive as people think we are.”. For Rahmani, based on looking at the broad range of the metrics she has, her view is that earnings this year are going to be probably about 14% to 20% overvalued. “That is not a bubble.”, marked Rahmani. “We actually look at an equity risk premium.– We actually have an indicator that looks at explosive price behavior, and we have to get that to around 90% to 100% to think we’re in a bubble. That (indicator) currently stands at 26%. It’s at 100% for Bitcoin but for something like equities, it is not showing bubble levels at all.”. She furthermore explained that if we compare the current scenario we have on the equities market today with the scenario where we’re at in the dot-com bubble, the levels today are substantially below. “So definitely not a bubble trouble yet from our perspective.”.
Referred to explosive growth, Mossavar-Rahmani also marked the GameStop Corp. (NYSE: GME) craze earlier last week. “It is clear that this is not necessarily justified from a valuation perspective. In an era of social media, easy access to trading, very low cost in terms of transaction costs for people. You could have a lot of momentum and a lot of investors can pile into an investment theme. That does mean that you’re going to end up with prices that don’t probably reflect fair value.” she said, adding that this type of event can be seen in many areas, not just in a particular stock but also in other sectors and asset classes. “Cryptocurrencies are a good example where you see the same type of price action where it’s not clear these are justified by any value argument and any fundamental arguments.”. According to Rahmani, the thing that happened to GameStop provides fewer risks in terms of the market’s price action. “It will get some attention, it will get a lot of headlines, but at the end of the day, one has to separate all this noise from the main signal. It’s not as if we would recommend our clients have a significant allocation to any of these sectors. Core assets really need to be in something like the S&P 500, in something like IFA, very small allocation for example to emerging markets but it needs to be more diversified.”, marked Rahmani while concluding that one of the Pillars of Goldman Sachs’ investment philosophy is the real way of creating good long-term wealth which is through having diversification in their portfolio.
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